Finance for Business (FIN 201): Solutions to Assignment Problems

This document presents comprehensive solutions to various finance problems, encompassing key areas such as short-term finance and planning, credit and inventory management, international corporate finance, and mergers and acquisitions. The solutions include detailed explanations and calculations for questions on operating cycles, cash budgeting, the impact of credit policies, purchasing power parity, interest rate parity, and the valuation of mergers. The document demonstrates the application of financial concepts and provides insights into real-world business scenarios, offering a valuable resource for students studying finance. The solutions are structured by chapter and question number, making it easy to navigate and understand the material. The content is a great resource for students seeking help with their finance homework and assignments.

Running Head: FINANCE FOR BUSINESS 1
Finance for Business:
Solutions to Problems

FINANCE FOR BUSINESS 2
Contents
Chapter 18: Short Term Finance and Planning......................................................................................3
Chapter 20: Credit and Inventory Management....................................................................................4
Chapter 21: International Corporate Finance........................................................................................6
Chapter 26: Mergers and Acquisitions...................................................................................................8
References...........................................................................................................................................10

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Chapter 18: Short Term Finance and Planning
Question 3
a. (I): If average receivables go up, receivables period will increase. Therefore increase in
receivables period will result in longer operating cycle.
b. (I): If credit repayment times for customers are increased, then receivables period will
increase. Therefore increase in receivables period will result in longer operating cycle.
c. (D): Increase in inventory turnover from 3 times to 6 times, will decrease inventory period.
So decrease in inventory period will result in shorter operating cycle.
d. (N): Operating cycle is unaffected by payables turnover ratio.
e. (D): Increase in receivable turnover from 7 times to 9 times, will decrease receivables
period. Therefore decrease in receivables period will result in shorter operating cycle.
f. (N): Operations cycle is unaffected by terms and conditions of payments to suppliers.
Question 11
This problem requires the presentation of cash budget of Nashville Nougats, Inc.
According to the question,
Cash collection from credit sales in a month = 35% of month’s credit sales + 60% of previous
month’s sales.
March April May June
Credit Sales 235000 374400 349500 420500
Credit Sales Collection ( in $) 272040 346965 356875
Sales collected in same month (35% of
month's sale) ( in $)
131040 122325 147175
5% Sales for the month that will not be
collected ( in $)
11750 18720 17475 21025
Sales of previous month collected (60%
of previous months's sale) ( in $)
141000 224640 209700
Total Cash available after collections of sales in a month = Beginning cash balance + Cash
collection from credit sales in a month
Cash paid for purchases in a month = Credit purchases of previous months

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March April May
Credit Purchases 161300 148900 169300
Credit Purchases Payments ( in $) 161300 148900
Purchases of previous month paid (100%
of previous months's sale) ( in $)
161300 148900
Total Cash disbursements = Cash paid for purchases in a month + Wages, taxes and
expenses + Interest + Equipment purchases
Ending balance = Total Cash available after collections of sales in a month - Total Cash
disbursements
Beginning balance of a month = Ending balance of previous month
(All figures in $) April May June
Beginning Cash Balance 135000 90020 70205
Cash Receipts
Credit sales collection 272040 346965 356875
Total Cash Available 407040 436985 427080
Cash Disbursments
Credit purchases payments 161300 148900 169300
Wages, taxes & expenses 54340 70300 75170
Interest 12580 12580 12580
Equipment purchases 88800 135000 0
Total Cash Disbursements 317020 366780 257050
Ending Cash Balance 90020 70205 170030
Chapter 20: Credit and Inventory Management
Question 8
Annual credit sales = $9.75 million = $9750000
Per day credit sales = Annual credit sales/365
Balance sheet account receivables = per day sales x average accounts receivable due days
Annual credit sales ($) 9750000
Per day credit sales ($) 26712.33
Average accounts
receivable due days
4
Balance sheet account
receivable ($) 106849.32
So, balance sheet receivable amount is equal to $106849.32

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Question 14
Calculating benefit of new policy
Benefit of new policy is obtained by first calculating the incremental cash flow
because of new policy and then finding the present value of incremental cash flow using the
given required rate of return.
Cash flow under current policy = (price under current policy – cost under current policy) x no
of units under current policy
Cash flow under new policy = (price under new policy – cost new current policy) x no of
units under new policy
Incremental cash flow = Cash flow under new policy - Cash flow under current policy
PV of benefit = Incremental cash flow / required rate of return
Calculating benefit of the new policy
Cash flow under current policy ($) 114800
Cash flow under new policy ($) 125430
Incremental Cash flow ($) 10630
Required rate per period 2.50%
PV of benefit ($) 425200
Calculating cost of switch
Cost of switch is equal to revenue of current period that is lost to due switch to new
policy plus cost of producing extra units under new policy
Cost of switch = Revenue for current period + cost of producing extra units
Revenue for current period = Price under current policy x no of units under current policy
Cost of producing extra units= Difference of units between both the policies x cost under new
policy
Calculating cost of switch
Revenue for current period ($) 239440
Cost of producing extra units ($) 4180
Total cost of switch ($) 243620

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Net Present Value = Present value of benefit – Total cost of switch = 425200 – 243620 =
$181580
Since NPV is positive, The Snedecker Corporation should proceed with the new
policy.
Chapter 21: International Corporate Finance
Question 4
a. As 1$=Can$1.09, therefore more Canadian dollars can be brought in a US dollar. Hence
US dollar is worth more than a Canadian dollar.
b. According to absolute PPP, cost of commodity does not change irrespective of currency in
which it is sold. The primary focus of this concept is on law of one price. After taking
cognizance of exchange rates, cost of a good in two countries are equal ( Ignatiuk, 2009).
Therefore, cost of Elkhead beer in USA = Cost of Elkhead beer in Canada/ spot rate
for 1 US$ to Can$= 2.50/1.09 = $2.29
Cost of Elkhead beer in Canada ( Can$) 2.50
Current spot rate for 1US$ to Can$ 1.09
Cost of Elkhead beer in USA ( US$) 2.29
So, cost of Elkhead beer USA is $2.29
c. Current spot rate: 1$=1.09Can$
Six month forward rate: 1$=1.11Can$
At present 1.09Can$ can brought in 1$. However after six months 1.11Can$ can brought in
1$. Therefore US dollar is expected to appreciate. Therefore, US dollar is selling at premium
to Canadian dollar.
d. Current spot rate: 1$=1.09Can$
Six month forward rate: 1$=1.11Can$

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At present 1.09Can$ can brought in 1$. However after six months 1.11Can$ can brought in
1$. Therefore US dollar is expected to appreciate.
e. According to interest rate parity,
Forward rate = spot rate x (interest rate in Canada – interest rate in USA)
1.11 = 1.09 x (interest rate in Canada – interest rate in USA)
Since US dollar will appreciating in 6 months, therefore interest rate in Canada must be more
than that in USA.
Question 7
Current spot rate £0.573
Three month forward rate £0.575
Amount to Invest (in million $) 30
Interest Rate per month in USA 0.31%
Interest Rate in Great Britain 0.34%
Months to invest 3
Amount of 30 million $ invested at the rate of 0.31% per month in USA will be
become 30.28 million $ after 3 months. Therefore, generating a holding period return of
0.93%.
For investment of the amount in Great Britain, 30 million $ in converted in pounds at current
rate of £0.573. Then converted amount of £ 52.36 million is invested at the rate 0.34% per
month in Great Britain for 3 months to become £ 52.89 million. £ 52.89 million is converted
back into $ at rate of £0.575 to become $30.41 million. Therefore, generating a holding
period return of 1.38% over 3 months for investment in Great Britain. So, higher amount of
return is generated when amount is invested in Great Britain. Amount should be invested in
Great Britain.

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If Amount is invested in USA
Total amount after 3 months(in million $) 30.28
Return on invetment in USA 0.93%
If Amount is invested in Great Britain
Current amount (in millions £) 52.36
Amount after 3 months (in millions £) 52.89
Amount after 3 months (in millions $) 30.41
Return on invetment in Great Britain 1.38%
Chapter 26: Mergers and Acquisitions
Question 1
Value of Jam to Pearl Inc = $357
Market Value of Jam = $319
Minimum synergetic benefits of merger = Value of Jam to Pearl Inc - Market Value
of Jam
Value of Jam to Pearl Inc ( in million $) 357
Market value of Jam ( in million $) 319
Minimum synergetic benefits of merger ( in
million $) 38
Synergetic benefits of merger are equal to $38 million.
Question 2
Purchase accounting is a method of combining the financial positions of two
organizations during acquisitions. Fair values of target firm are taken into consideration while
consolidating two balance sheets (Walk, Dodd & Rozycki, 2012).
In this problem, total market value of both the firms is calculated by multiplying
shares outstanding by market price per share.
Price paid by Firm X in merger = number of shares of Firm Y x (market value per share of Y
+ premium paid per share)

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Premium per share paid ($) 6
Firm X Firm Y
Total earnings ($) 87000 11000
Shares outstanding 35000 12000
Per share values
Market($) 57 19
Book($) 7 3
Total market value of firms before merger($) 1995000 228000
Book Value of firms($) 245000 36000
Price per share paid by Firm X ($) 25
Total amount paid by Firm X($) 300000
After merger, under purchase accounting
Total earnings = earnings of Firm X + earnings of Firm Y
Shares outstanding after merger = Shares of Firm X
Book Value per share after merger = Book value per share of Firm X
Market Value per share after merger = (Market value of Firm X + Total Amount Paid by
Firm X) / No of outstanding shares of Firm X
Goodwill = Total Amount Paid by Firm X – Market value of Firm Y
Total Earnings($) 98000
Shares Outstanding 35000
Per share value
Market($) 65.57
Book($) 7
Goodwill($) 72000
Combined Financial Position of Firm X

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References
Ignatiuk, A. (2009). The principle, practise and problems of purchasing power parity theory.
Norderstedt, Germany: GRIN Verlag.
Walk, H. I., Dodd, J. L., & Rozycki, J. J. (2012). Accounting theory: Conceptual issues in a
political and economic environment. London, UK: SAGE Publications.