Commercial paper. Toro, the Wisconsin-based AA-rated manufacturer of snow-blowers and lawn mowers, anticipates that because of the seasonal nature of its business it will require an additional US$250 million for working capital during the second quarter (April, May, and June). The funding options are: Commercial paper issued for 90 days at the annual interest rate of 4.75 percent. Issuance cost, including the expense of a backup line of credit (credit enhancement), is 50 basis points of the amount issued. c. Would the funding cost faced by Toro be different if it were AAA-rated? d. Would you recommend that Toro select the cheaper funding option?

Commercial paper. Toro, the Wisconsin-based AA-rated manufacturer of snow-blowers and lawn mowers, anticipates that because of the seasonal nature of its business it will require an additional US$250 million for working capital during the second quarter (April, May, and June). The funding options are: Commercial paper issued for 90 days at the annual interest rate of 4.75 percent. Issuance cost, including the expense of a backup line of credit (credit enhancement), is 50 basis points of the amount issued. c. Would the funding cost faced by Toro be different if it were AAA-rated? d. Would you recommend that Toro select the cheaper funding option?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 22P

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Commercial paper. Toro, the Wisconsin-based AA-rated manufacturer of snow-blowers and lawn mowers, anticipates that because of the seasonal nature of its business it will require an additional US$250 million for working capital during the second quarter (April, May, and June). The funding options are: Commercial paper issued for 90 days at the annual interest rate of 4.75 percent. Issuance cost, including the expense of a backup line of credit (credit enhancement), is 50 basis points of the amount issued.a. Compute the cost of each funding option.b. How do you explain the difference in funding cost?
Commercial paper. Toro, the Wisconsin-based AA-rated manufacturer of snow-blowers and lawn mowers, anticipates that because of the seasonal nature of its business it will require an additional US$250 million for working capital during the second quarter (April, May, and June). The funding options are: Bank loan from Wachovia Trust in the form of a one-year line of credit for US$250 million at the annual rate of 6 percent. Wachovia charges a commitment fee of 0.5 percent on the unused portion of the line of credit. (Need explanation for this question) Commercial paper issued for 90 days at the annual interest rate of 4.75 percent. Issuance cost, including the expense of a backup line of credit (credit enhancement), is 50 basis points of the amount issued.a. Compute the cost of each funding option.b. How do you explain the difference in funding cost?c. Would the funding cost faced by Toro be different if it were AAA-rated?d. Would you recommend that Toro select the cheaper funding…
Terrel Manufacturing expects stable sales through the summer months of June, July, and August of $500,000 per month. The firm will make purchases of $350,000 per month during these months. Wages and salaries are estimated at $60,000 per month plus 7 percent of sales. The firm must make a principal and interest payment on an outstanding loan in June of $100,000. The firm plans a purchase of a fixed asset costing $75,000 in July. The second quarter tax payment of $20,000 is also due in June. All sales are for cash.(a) Construct a cash budget for June, July, and August, assuming the firm has a beginning cash balance of $100,000 in June.(b) The sales projections may not be accurate due to the lack of experience by a newly-hired sales manager. If the sales manager believes the most optimistic and pessimistic estimates of sales are $600,000 and $400,000, respectively, what are the monthly net cash flows and required financing or excess cash balances? Make your recommendations.
Terrel Manufacturing expects stable sales through the summer months of June, July, and August of $500,000 per month. The firm will make purchases of $350,000 per month during these months. Wages and salaries are estimated at $60,000 per month plus 7 percent of sales. The firm must make a principal and interest payment on an outstanding loan in June of $100,000. The firm plans a purchase of a fixed asset costing $75,000 in July. The second quarter tax payment of $20,000 is also due in June. All sales are for cash. Construct a cash budget for June, July, and August, assuming the firm has a beginning cash balance of $100,000 in June. The sales projections may not be accurate due to the lack of experience by a newly-hired sales manager. If the sales manager believes the most optimistic and pessimistic estimates of sales are $600,000 and $400,000, respectively, what are the monthly net cash flows and required financing or excess cash balances?
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Camber Corporation has to decide if they can finance purchasing 10 new machines for all their manufacturing sites. The machines cost $1.73 million each, and the supplier agreed to the following payment terms, 40% upfront, and the remainder to be paid over 4 years at an annual rate of 12%. Executives at Camber Corporation review their budgets and discover that they can pay the supplier 40% now, but their budget will only allow them to pay $4,000,000 per year for the next four years. Will that be enough to make the purchase? Critically discuss the effect of increasing the amount paid upfront when corporations make capital purchases, focusing on the benefits and drawbacks
Cisco is considering the development of a wireless home networking appliance, called HomeNet. The company expects to sell 370000 units per year over the project's life at an expected wholesale price of 170. Actual production will be outsourced at a cost of 96 per unit. Additionally, the company will spend $27000 in interest expense each year towards financing the project. In year 1, the firm must increase its accounts receivable by $870000, which will return to regular levels at the end of the project. The company spent $291000 last year on software to develop the router. $106.8 million of new equipment will be purchased and then depreciated using the straight - line method over a 10-year life. They expect the market value of the equipment to depreciate at 6.6% per year. The project is expected to end in year 7. The current tax rate is 21%. Use this rate for both income tax rate and the capital gains rate. The WACC for the company is 12.6%. What is the NPV of the project?
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