Answer each question separately.

Problem #1

1. City Farm Insurance has collection centers across the country to speed up collections. The company also makes its disbursements from remote disbursement centers. The collection time has been reduced by two days and disbursement time increased by one day because of these policies. Excess funds are being invested in short-term instruments yielding 12% per annum.

a. If City Farm has $5 million per day in collections and $3 million per day in disbursements, how many dollars has the cash management system freed up?

b. How much can City Farm earn in dollars per year on short-term investments made possible by the freed-up cash?

2.

Why are Treasury bills a favorite place for financial managers to invest excess cash?

Why might a firm keep a safety stock? What effect is it likely to have on carrying cost of inventory?

3.

What is the present value of:

a. $7,900 in 10 years at 11 percent?

b. $16,600 in 5 years at 9 percent?

c. $26,000 in 14 years at 6 percent?

4.

1. Why does money have a time value?

2. List five different financial applications of the time value of money.

5.

Lone Star Company has $1,000 par value bonds outstanding at 10 percent interest. The bonds will mature in 20 years. Compute the current price of the bonds if the present yield to maturity is:

a. 6 percent.

b. 9 percent.

c. 13 percent.

6.

1. What are the three factors that influence the required rate of return by investors?

2. What type of dividend pattern for common stock is similar to the dividend payment for preferred stock?