They are questions about Finance

| June 14, 2016

Question
Question 1 (Financial forecasting) Zapatera Enterprises is evaluating its financing requirements for the
coming year. The firm has been in business for only 1 year, but its CFO predicts that the firms operating
expenses, current assets, net fixed assets, and current liabilities will remain at their current proportion of
sales.
Last year Zapatera had $12million in sales, and net income of $1.2 million. The firm anticipates that next
years sales wilQuestion
[Hedge Equity Portfolio] It is July 16. A company has a portfolio of stocks worth $12
million. The beta of the portfolio is 1.5. The company would like to use the CME December
futures contract on the S&P 500 to change the beta of the portfolio to 1.2 during the period
July 16 to November 16. The index futures price is currently 1,000 and each contract is on
$250 times the index.
1.

(a) What position should the company take? (2pts)
(b) On Nov. 1st, the level of S&P 500 is 1200 and the futures price is 1203. What is value of
the position taken in (a) ? (6pts)
(c) Suppose that the company changes its mind and decides to increase the beta of the
portfolio from 1.5 to 1.7. What position in futures contracts should it take? (2pts)

2. [Forward Valuation w/ No Income] A 1-year long forward contract on a non-dividend-

paying stock is entered into when the stock price is $40 and the risk-free rate of interest is
12% per annum with continuous compounding.
a)

What are the forward price and the initial value of the forward contract? (2pts)

Six months later, the price of the stock is $46 and the risk-free interest rate is still
12%. What are the forward price and the value of the forward contract? (2-2pts)
b)

3. [Future Valuation with Dividend Income] A stock index currently stands at 340. The

risk-free interest rate is 9% per annum (with continuous compounding) and the dividend
yield on the index is 5% per annum. What should the futures price for a 4-month contract be?

4. [Future Valuation with Storage Cost] The spot price of silver is $15 per ounce. The

storage costs are $0.24 per ounce per year payable quarterly in advance. Assuming that
interest rates are 10% per annum for all maturities, calculate the futures price of silver for
delivery in 9 months.

5. [Future Evaluation with Varying Interest Rate] An index is 1,200. The three-month

risk-free rate is 3% per annum and the dividend yield over the next three months is 1.2% per
annum. The six-month risk-free rate is 3.5% per annum and the dividend yield over the next
six months is 1% per annum. Estimate the futures price of the index for three-month and six-

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month contracts. All interest rates and dividend yields are continuously compounded.(Hint:
Match the risk-free rate with the dividend yield and corresponding maturity)

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l reach $15.0 million, with net income rising to $1.32 million. Given its present high rate
of growth, the firm retains all its earnings to help defray the cost of new investments.
The firms balance sheet for 2013 is found in the popup window:
Balance Sheet

12/32/2013

% of Sales

Current assets

$3,000,000

25%

6,600,000

55%

Net fixed assets
Total

$9,600,000
LIABILITIES AND OWNERS EQUITY

Accounts payable

$1,800,000

15%

Long-term debt

1,300,000

NAa

Total liabilities

$3,100,000

Common stock

1,000,000

NA

Paid-in capital

4,300,000

NA

Retained earnings

1,200,000

Common equity

6,500,000

Total

$9,600,000

Questions: Estimate Zapateras financing requirements (that is, total assets) for 2014 and its discretionary
financing needs (DFN).

Question 2 (Percent of sales forecasting) which of the following accounts would most likely vary
directly with the level of a firms sales? Discuss each briefly.
Yes
Cash

No

___

____

Yes
Notes payable

No

____

____

Marketable securities____ ____

Plan and equipment _____

____

Accounts payable _____ _____

Inventories

_____

_____

Is cash likely to vary directly with the level of a firms sales?

a. No, cash receipts follow sales with a lag related to the payment habits of the firms customers and
the firms policy regarding payments on its accounts payable.

b. Yes, cash receipts vary directly with sales and have a relation to the firms customers payment
habit or the firms policy regarding payments on its accounts payable.

Question 3 (Forecasting discretionary financing needs) Fishing Charter Inc. estimates that it invests
$0.33 in assets for each dollar of new sale. However, $0.04 in profits are produced by each dollar of
additional sales, of which $0.01 can be reinvested in the firm. If sales rise by $600.000 next year from
their current level of $6 million, and the ratio of spontaneous liabilities to sales is 9 percent, what will be
the firms need for discretionary financing? (Hint: In this situation you do not know what the firms
existing level of assets is, nor do you know how spontaneous liabilities, retained earnings, and other
sources of discretionary financing).
The firms need for discretionary financing is: $

(round to the nearest dollar)

Question 4 (Cash Budget) the Sharpe Corporations projected sales for the first 8 months of 2014 are
shown in the following table:
January

$250,000

May

$360,000

February

180,000

June

330,000

March

195,000

July

285,000

April

300,000

August

210,000

Of Sharpes sales, 20 percent is for cash, another 40 percent is collected in the month following the sales,
and 40 percent is collected in the second month following sales. November and December sales for 2013
were $280,000 and $235,000, respectively. Sharpe purchases its raw materials 2 months in advance of its
sales. The purchases are equal to 50 percent of the final sales price of Sharpes products. The supplier is
paid 1 month after it makes a delivery. For example, purchases for April sales are made in February, and
payment is made in March. In addition, Sharpe pays $8,000 per month for rent and $16,000 each month
for other expenditures. Tax prepayments of $22,000 are made each quarter, beginning in Mach.
The Companys cash balance on December 31, 2013 was $25,000. This is minimum balance the firm
wants to maintain. Any borrowing that is needed to maintain this minimum is paid off in the subsequent
month if there is sufficient cash. Interest on short-term loans (12 percent) is paid monthly. Borrowing to
meet estimated monthly cash needs takes place at the beginning of the month. Thus, if in the month of
April the firm expects to have a need for an additional $60,500, these funds would be borrowed at the
beginning of April with interest of $605 (0.12x 1/12 x $60,500) owed for April and paid at the beginning
of May.

a. Prepare a cash budget for Sharpe covering the first 7 months of 2014.
b. Sharpe has $200,000 in notes payable due in July that must be repaid or renegotiated for an
extension. Will the firm have ample cash to repay the notes?

a. Prepare a cash budget for Sharpe covering the first 7 months of 2014.
Fill in the Collections for the month of January. (Round to nearest dollar)

Sales
Collection
s
Month of
sales
(20%)
First
month
(40%)
Second

Nov
$280,00
0

Dec
$235,00
0

Jan
$250,000

Feb
$180,00
0

Mar
$195,00
0

Apr
$300,00
0

May
$360,00
0

June
$330,00
0

July
$285,000

month
(40%)
Total
Collection
s

Question 5 (Cash conversion cycle) Sims Electric Corp, has been striving for the last 5 years to
improve its management of working capital. Historical data for the firm sales, accounts
receivable, inventories, and accounts payable follow:
JAN-10

JAN-11

JAN-12

JAN-13

JAN-14

2,874

3,482

5,255

7,788

12,397

Receivables

426

550

710

923

1,422

Accounts payable

277

433

478

1,041

1,638

Inventories

232

311

429

264

244

Sales Net

a. Calculate Sims days of sales outstanding, days of payables outstanding and days of sales

in inventory for each of the 5 years. Assume a 365 day year. Hint: assume that the firms
cost of goods sold equals 70% of sales.

JAN-10

JAN-11

JAN-12

JAN-13 JAN-14

Days of sales Outstanding (DSO)

b. Calculate Sims cash conversion cycle for each of the 5 years. Evaluate Sims overall

management of its working capital. Assume a 365 day year.

Question 6 (Cost of factoring) MDM Inc. is considering factoring its receivables. The firm has
credit sales of $300,000 per month and has an average receivables balance of $600,000 with 60
day credit terms. The factor has offered to extend credit equal to 91 percent of the receivables
factored less interest on the loan at a rate of 1.6 percent per month. The 9 percent difference in
the advance and the face value of all receivables factored consists of a 2 percent factoring fee
plus a 7 percent reserve, which the factor maintains. In addition, if MDM Inc. decides to factor
its receivables, it will sell them all, so that it can reduce its credit department costs by $1,600 a
month.

What is the cost of borrowing the maximum amount of credit available to MDM Inc. through the
factoring agreement? Note: Assume a 30 day month and 360 day year.
The cost of borrowing the maximum amount of credit available to MDM Inc. through the
factoring agreement is %. (Round to two decimal places).

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