Financial Management II
ASSIGNMENT 04
BU440
Financial Management II
Directions:
Be sure to save an electronic copy of your answer before submitting it
to Ashworth College for grading. Unless otherwise stated, answer in complete
sentences, and be sure to use correct English, spelling, and grammar.
Respond to the items below.
Part A: Cost of Debt
Kenny
Enterprises has just issued a bond with a par value of $1,000, twenty years to
maturity, and an 8% coupon rate with semiannual payments.
a.
What
is the cost of debt for Kenny Enterprises if the bond sells at the following
prices?
1.
$920
2.
$1,000
3.
$1,080
4.
$1,173
b.
What
do you notice about the price and the cost of debt?
Part B: Comparing
NPV and IRR
Chandler
and Joey were having a discussion about which financial model to use for their
new business. Chandler supports NPV and Joey supports IRR. The discussion
starts to get heated when Ross steps in and states, “Gentlemen, it doesn’t
matter which method we choose, they give the same answer on all projects.”
a.
Is
Ross correct?
b.
Under
what three (3) conditions will IRR and NPV be consistent when accepting or
rejecting projects?
Part C: Production
Cash Outflow
The
Creative Products Corporation produces its products two months in advance of
anticipated sales and ships to warehouse centers the month before sale. The
inventory safety stock is 15% of the anticipated month’s sale. Beginning
inventory in October 2009 was 120,000 units. Each unit costs $1.50 to make. The
average selling price is $2.50 per unit. The cost is made up of 60% labor, 30%
materials, and 10% shipping (to warehouse). Labor is paid the month of
production, shipping the month after production, and raw materials the month
prior to production. What is the production cash outflow for the month of
October 2009 production, and in what months does it occur? Assume that the sales forecast for December 2009 is $2,500,000.
