EBK CORPORATE FINANCE
4th Edition
ISBN: 9780134202785
Author: DeMarzo
Publisher: VST
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Chapter 26, Problem 8P
Summary Introduction
To think critically: About whether S Corporation has to switch to a new bank.
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The Polk Corporation is trying to decide whether to switch to a bank that will accommodate electronic funds transfers from Polk's customers. Polk's financial manager believes the new system would
decrease its collection float by as much as 7 days. The new bank would require a compensating balance of $23 000, whereas its present bank has no compensating balance requirement. Saban's
average daily collections are $11 000, and it can earn 8% on its short-term investments. Should Polk make the switch? (Assume the compensating balance at the new bank will be deposited in
a non-interest-earning account.)
As a result of using the electronic funds transfer system, the amount of collection float freed up by the loan is $
(Round to the nearest dollar.)
The Berti Corporation is trying to decide whether to switch to a bank that will accommodate electronic funds transfers from Berti 's customers. Berti 's financial manager believes the new system would decrease its collection float by as much as five days. The new bank would require a compensating balance of $4,000,000, whereas its present bank has no compensating balance requirement. Additionally, the new bank will require a fixed annual fee of $200,000 each year to service the account. Berti 's average daily collections are $2,000,000, and it can earn 6% on its short-term investments. Should Berti make the switch? (Assume the compensating balance at the new bank will be deposited in a non-interest earning account.)
It typically takes Law Corporation 8 days to receive and deposit customer remissions. Law is considering a lockbox system and anticipates that the system will reduce the float time to 5 days. Average daily cash receipts are P220,000. The rate of return is 10 percent.
Requirement:
What is the reduction in cash balances associated with implementing the system?
What is the rate of return associated with the earlier receipt of the funds?
What should be the maximum monthly charge associated with the lockbox proposal?
Chapter 26 Solutions
EBK CORPORATE FINANCE
Ch. 26.1 - What is the firms cash cycle? How does it differ...Ch. 26.1 - How does working capital impact a firms value?Ch. 26.2 - Prob. 1CCCh. 26.2 - Prob. 2CCCh. 26.3 - Prob. 1CCCh. 26.3 - Prob. 2CCCh. 26.4 - What is accounts payable days outstanding?Ch. 26.4 - What are the costs of stretching accounts payable?Ch. 26.5 - What are the benefits and costs of holding...Ch. 26.5 - Prob. 2CC
Ch. 26.6 - Prob. 1CCCh. 26.6 - Prob. 2CCCh. 26 - Prob. 1PCh. 26 - Prob. 2PCh. 26 - Aberdeen Outboard Motors is contemplating building...Ch. 26 - Prob. 4PCh. 26 - Prob. 5PCh. 26 - Prob. 6PCh. 26 - The Fast Reader Company supplies bulletin board...Ch. 26 - Prob. 8PCh. 26 - Prob. 9PCh. 26 - Prob. 10PCh. 26 - The Mighty Power Tool Company has the following...Ch. 26 - What is meant by stretching the accounts payable?Ch. 26 - Prob. 13PCh. 26 - Your firm purchases goods from its supplier on...Ch. 26 - Use the financial statements supplied on the next...Ch. 26 - Prob. 16PCh. 26 - Which of the following short-term securities would...
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- Bird's Eye Treehouses, Incorporated, a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using a lockbox system offered by a bank located in Pittsburgh. The bank has estimated that use of the system will reduce collection time by 1.5 days. Assume 365 days a year. Average number of payments per day Average value of payment Variable lockbox fee (per transaction) Annual interest rate on money market securities 850 $ 800 $.10 a. NPV b. NPV 3.2% a. What is the NPV of the new lockbox system? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Suppose in addition to the variable charge that there is an annual fixed charge of $3,000 to be paid at the end of each year. What is the NPV now? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)arrow_forwarda. Paradise Retailers, Inc. (PRI) determined that $1,500,000 is needed for cash transactions made during the next year. Each time PRI deposits money in its checking account, a charge of $12.95 is assessed to cover clerical costs. PRI can hold marketable securities that yield 4.5%, and then convert these securities to cash at a cost of only the $12.95 deposit charge. Optimal Cash Amount = 29382.53 PRI’s financial managers have not been following the Baumol Model. Instead, they have been transferring cash from marketable securities less frequently, namely, transferring cash every three weeks. What total cash cost including holding costs and transactions costs could PRI save by transferring the optimal cash amount C* rather than this larger transfer amount?arrow_forwardSheila's Society Clothing Manufacturer has collection centres around the country to speed up cash collections. The company also makes its disbursements from remote disbursement centres, so cheques written by Sheila's take longer to clear the bank. Collection time has been reduced by three days and disbursement time has been increased by two days because of these policies. Excess funds are being invested in short-term instruments yielding 5 percent per annum. a. If the firm has $4.20 million per day in collections and $3.20 million per day in disbursements, how many dollars has the cash management system freed up? (Enter the answer in dollars not in millions.) Freed-up funds b. How much can Sheila's earn per year on short-term investments made possible by the freed-up cash? (Enter the answer in dollars not in millions.) Interest on freed-up cash $arrow_forward
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