In an effort to speed up the collection of receivables, hill

1. In an effort to speed up the collection of receivables, Hill publishing Company is considering increasing the size of its cash discount by changing its credit terms from “1/10, net 30” to “2/10, net 30”. Currently the company’s collection period average 43 days. Under the new credit terms, it is expected to decline to 28 days. Also, the percentage of customers who will take advantage of the cash discount is expected to increase from the current 50 percent to 70 percent with the new credit terms. Bad debt loses currently average 4 percent of sales and are not expected to change significantly if Hill changes its credit policy. Annual credit sales are $3.5 million, the variable cost ratio is 60 percent, and the required pretax rate of return (i.e, the opportunity cost) on receivable investment is 14 percent. The company does not expect its inventory level to change as a result of its proposed change in credit terms. Assuming that hill does decide to increase the size of its cash discount, determine the following;

 

a.      The earnings on the funds released by the change in credit terms.

b.      The cost of the additional cash discounts taken

c.      The net effect on Hill’s prefax profits

 

2. Set up the amortization schedule for a 5-year, $1 million, 9 percent loan that requires equal annual end-of-year principal payments plus interest on the unamortized loan balance. What is the effective interest cost of this loan?

 

3. Apex Corporation is considering the purchase of Pinnacle Company in a stock-for-stock exchange. Selected data on the two companies are shown in the following table:

                                                                          Apex          Pinnacle

__________________________________________________________________

Sales (millions)                                                        $ 750             $175

Earnings after taxes (millions)                        $ 100             $ 20

Common shares outstanding (millions)                50               20

Share price                                                    $ 40     $ 15

Earnings per share                                         $ 2.00          $ 1.00

Dividends per share                                                 $ 1.00             $ 0.40

P/E ratio                                                                    20                  15

Dividend payout ratio                                        50%              40%

 

Assume that there are no synergistic benefits as the result of the merger. Determine EPS for the combined company if Apex offers  a

 

a.       20 percent premium for Pinnacle

b.      40 percent premium  for Pinnacle

 

c.       50 percent premium for Pinnacle

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