Bana Manufacturing sells on terms of 215, net 40, Total annual sales are $9,500,

Question

Bana Manufacturing sells on terms of 215, net 40, Total annual sales are $9,500,000. 40% of the customers pay on the 15th day and take discounts, 40% pay in 40 days and the remaining customers pay, on average, 60 days after their purchases. a. What is the Banua's accounts receivable balance? b. What is the nominal cost of trade credit to those customers that pay 60 days after their purchases? 1. 2. Managers of Play Now Inc. are determining the company's capital budget for the next year and are considering the g projects Size S525,000 450,000 375,000 390,000 220,000 120,000 IRR 13% 11% 10% 9% 890 7.25% Risk High High Average Average Low Low ect Play Now estimates that its WACC is 9.15% and this rate would be applicable to average-risk projects. All projects are independent. The company adjusts for risk by adding 2.25% to the WACC for high-risk projects and subtracting 2.25% from the WACC for low-risk projects. a. Which of the above projects should Play Now accept? b. If there are no capital constraints, what will the size of Play Now's capital budget be? 3. Indicate whether each of the following actions would increase or decrease a firm's WACC The corporate tax rate for the firm decreases The Federal Reserve lowers interest rates Investors become less risk averse a. b. c.

Explanation / Answer

1) a) Average collection period = 15*40%+40*40%+60*20% = 34 days Accounts receivable balance = 9500000*34/365 = $     8,84,932 b) Cost of trade credit for 25 days = 2/98 Nominal cost on a yearly basis = (2/98)*365/25 = 29.80% 2) a) Projects whose IRR is greater than the appropriate WACC are to be accepted. Hence, the following projects are acceptable. [WACC of normal projects is 9.15%; of Low risk projects is 6.90% (9.15-2.25) and for High risk projects is 11.40% (9.15+2.25)] Projects A, C, E and F. b) Size of the capital budget = 525000+375000+220000+120000 = 1240000 3) a) Increase WACC (as debt will become costlier & and dividend expectations will be higher) b) Decrease WACC (as required rates will become lower) c) WACC will be lower as more capital will be available.

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