Subject: Finance - Recommended textbook for the subject: Ross, Stephen A., Westerfield, Randolph W., Jordan, Bradford D. Essentials of Corporate Finance. (CHAPTERS 16, 17 & 18) - Answer the follow

A nsw er t h ese e ssay q uestio ns: 1. P IE PKO RN M AN UFA C TU RIN G W ORKIN G C APIT A L M AN AG EM EN T, P A R T 1 Y ou h ave r e ce ntly b een h ir e d b y P ie pko rn M an ufa ctu rin g to w ork in it s n ew ly e sta blis h ed tr e asu ry d epartm en t. P ie pko rn M an ufa ctu rin g is a s m all c o m pany th at pro duce s c a rd board b oxe s in a v a rie ty o f s iz e s. G ary P ie pko rn , th e o w ner o f th e co m pany, w ork s p rim arily in th e s a le s a nd p ro ductio n a re as. C urre ntly , th e c o m pany puts a ll r e ce iv a ble s in o ne s h oe b ox a nd a ll p aya b le s in a noth er. B eca use o f th e dis o rg aniz e d s yste m , th e fin ance a re a n eeds w ork , a nd th at's w hat y o u'v e b een bro ught in to d o. T he c o m pany c u rre ntly h as a c a sh b ala nce o f $ 154,0 00 a nd p la ns to p urc h ase n ew b ox fo ld in g m ach in ery in th e fo urth q uarte r a t a c o st o f $ 325,0 00.

T he p urc h ase o f th e m ach in ery w ill b e m ad e w it h c a sh b eca u se o f th e d is co unt off e re d. T he c o m pany's p olic y is to m ain ta in a ta rg et c a sh b ala nce o f $ 100,0 00. A ll s a le s a re in c a sh a nd a ll p urc h a se s a re m ad e o n c re dit . G ary P ie pko rn h as pro je cte d th e fo llo w in g g ro ss s a le s fo r e ach o f th e n ext fo ur q uarte rs : Q uarte rs 0 1 02 03 04 G ro ss S ale s $863,5 00 $918,5 00 $996,0 00 $924,0 00 G ro ss s a le s fo r th e fir s t q uarte r o f n ext y e a r a re p ro je cte d a t $ 908,0 00. P ie pko rn ty p ic a lly o rd ers 5 0 p erc e nt o f n ext q uarte r's p ro je cte d g ro ss s a le s in th e c u rre nt quarte r, a nd s u pplie rs a re ty p ic a lly p aid in 5 3 d ays. W ages, ta xe s, a nd o th er c o sts r u n a bout 3 0 p erc e nt o f g ro ss s a le s. T he c o m pa ny h as a q uarte rly in te re st p aym ent of $ 11 5,0 00 o n it s lo ng-te rm d ebt. T he c o m pa ny u se s a lo ca l b ank fo r it s s h ort- te rm fin ancia l n eeds. It p ays 1 .5 p erc e nt p er q uarte r o n a ll s h o rt- te rm b orro w in g a nd m ain ta in s a m oney m ark e t a cco unt th at p ays 1 p erc e n t p er q uarte r o n a ll s h ort- te rm d eposit s . G ary h as a ske d y o u to p re pare a c a sh b udget a nd s h o rt- te rm fin ancia l pla n fo r th e c o m pany u nder th e c u rre nt p olic ie s. H e h as a ls o a ske d y o u to p re pare a ddit io nal p la ns b ase d o n c h ang es in s e ve ra l in puts . Q UESTIO NS a. U se th e n um bers g iv e n to c o m ple te th e c a sh b udget a nd s h o rt- te rm fin ancia l pla n.

b. R ew ork th e c a sh b udget a nd s h o rt- te rm fin ancia l p la n a ssu m in g P ie pko rn c h anges to a ta rg et b ala nce o f $ 80,0 00. P IE PK O RN M ANUFA CTU RIN G Short-T e rm F in an cia l P la n Q 1 Q2 Q3 Q4 Begin nin g c a sh b ala nce N et c a sh in flo w E ndin g c a sh b ala nce Min im um c a sh b ala nce C um ula tiv e s u rp lu s ( d efic it ) P IE PK O RN M ANUFA CTU RIN G Short-T e rm F in an cia l P la n Q 1 Q2 Q3 Q4 Ta rg et c a sh b ala nce N et c a sh in flo w N ew s h ort- te rm in ve stm ents In co m e fr o m s h ort- te rm in ve stm ents S hort- te rm in ve stm ents s o ld N ew s h ort- te rm b orro w in g In te re st o n s h ort- te rm b orro w in g S hort- te rm b orro w in g r e paid E ndin g c a sh b ala nce M in im um c a sh b ala nce C um ula tiv e s u rp lu s ( d efic it ) B egin nin g s h ort- te rm in ve stm en ts E ndin g s h ort- te rm in ve stm ents B egin nin g s h ort- te rm d ebt E ndin g s h ort- te rm d ebt 2. P IE PKO RN M AN UFA C TU RIN G W ORKIN G C APIT A L M AN AG EM EN T, P A R T 2 A fte r c o m ple tin g th e s h ort- te rm fin ancia l p la n fo r n ext y e a r ( a bove p art 1 ), G ary P ie pko rn a ppro ach es y o u a nd a sks a bout th e c o m pa ny's c re dit p olic y. In lo okin g a t th e c o m petit io n, m ost c o m panie s in th e in dustr y o ff e r c re dit to c u sto m ers , s o P ie pko rn M anufa ctu rin g a ppears to b e o ne o f th e fe w c o m pa nie s th at d oes n ot.

S eve ra l c u sto m ers h ave e xp re sse d th e p ossib ilit y o f c h a ngin g to a d if f e re nt s u pplie r beca use o f th e la ck o f c re dit . G ary is in te re ste d in k n o w in g h ow im ple m entin g a c re dit p olic y w ill a ff e ct th e s h ort- te rm fin ancia l p la n fo r n ext y e a r.

A ddit io nally , h e w ould lik e y o u to in quir e a s to th e p ossib ilit y o f g ettin g im pro ve d cre dit te rm s fo r th e c o m pany's p urc h a se s. T o a naly ze th e p ossib le s w it c h to th e n ew cre dit te rm s, G ary h as a ske d y o u to in ve stig ate in dustr y s ta ndard c re dit te rm s a nd re w ork th e s h ort- te rm fin ancia l p la n a ssu m in g P ie pko rn M an ufa ctu rin g o ff e rs c re dit t o it s c u sto m ers . H e w ould a ls o lik e to in ve stig ate h ow b ette r c re dit te rm s fr o m th e co m pany's s u pplie rs w ould a ff e ct th e s h o rt- te rm fin ancia l p la n. a. Y ou h ave lo oke d a t th e c re dit p olic y o ff e re d b y y o u r c o m pe tit o rs a nd h ave d ete rm in ed th at th e in dustr y s ta n dard c re dit p olic y is 1 /1 0, n et 4 5. T he d is co unt w ill b egin to b e o ff e re d o n th e fir s t d ay o f th e y e a r. Y ou w ant to e xa m in e h ow th is credit policy would affect the cash budget and short-term financial plan. If this credit policy is implemented, you believe that 60 percent of customers will take advantage of the credit offer and the accounts receivable period will be 24 days.

Rework the cash budget and short-term financial plan under the new credit policy and a target cash balance of $80,000. What interest rate are you effectively offering customers?

b. You have talked to the company's suppliers about the credit terms Piepkorn receives. Currently, the company receives terms of net 45. Your suppliers have stated that they would offer new credit terms of 2/25, net 40. The discount would begin to be offered on the first day of the year. What interest rate are the suppliers offering the company? Rework your cash budget and short-term financial plan from the previous question assuming you take advantage of the discount offered.3.

Suppose the rate of inflation in Russia will run about 3% higher than the U.S.

inflation rate over the next several years. All other things being the same, what will happen to the ruble versus dollar exchange rate? What relationship are you relying on in answering?

4. This question has to do with the Cash Account. Indicate the impact of the following corporate actions on cash, using the terms Increase, Decrease, or no change. For each, explain your conclusion.

- A dividend is paid with funds received from a sale of debt - Real estate is purchased and paid for with short-term debt - Inventory is bought on credit - A short-term bank loan is repaid - Next years’ taxes are prepaid.

5. You have $10,000 on deposit with no outstanding checks or uncleared deposits. One day you write a check for $5,000 and then deposit a check for $3,000. What are your (a) disbursement, (b) collection, and (c) net floats? Explain your conclusions.