Concept explainers
a)
To compute: The average daily collection floats.
Introduction:
The float is the difference between the bank cash and the book cash, denoting the net effects of checks in the clearing process.
a)
Answer to Problem 6QP
The average daily float is $25,016.
Explanation of Solution
Given information:
The mail-order company processes checks of $5,300 per month. From these checks, 60% are for $43 and 40% are from $75. There is a delay of two days on an average for $43 checks and a delay of three days for $75 checks.
Explanation:
Formula to compute the average daily float:
Compute the average daily float:
Hence, the average daily float is $25,016.
b)
To compute: The weighted average delay.
b)
Answer to Problem 6QP
The weighted average delay is 2.54 days .
Explanation of Solution
Formula to compute the total collections:
Compute the total collections:
Hence, the total collection is $295,740.
Formula to compute the weighted average delay:
Compute the weighted average delay:
Hence, the weighted average delay is 2.54 days.
c)
To compute: The amount the company will be willing to pay to avoid the float.
c)
Answer to Problem 6QP
The amount the company will be willing to pay to avoid the float is $25,039.32.
Explanation of Solution
Formula to compute the average daily float:
Compute the average daily float:
Hence, the average daily float is $25,039.32.
d)
To compute: The daily float cost, if the rate of interest is 7% per year.
d)
Answer to Problem 6QP
The daily float cost is $4.64.
Explanation of Solution
Formula to compute the average daily rate of interest:
Compute the average daily rate of interest:
Hence, the average daily rate is 0.01854% per day.
Formula to compute the daily float cost:
Compute the daily float cost:
Hence, the daily float cost is $4.64.
e)
To compute: The amount that the company will be willing to pay to decrease the weighted average float to 1.5 days.
e)
Answer to Problem 6QP
The amount that the company will be willing to pay to decrease the weighted average float to 1.5 days is $10,252.32.
Explanation of Solution
Formula to compute the new average daily float:
Compute the new average daily float:
Hence, the new average daily float is $14,787.
Formula to compute the maximum payment amount:
Compute the maximum payment amount:
Hence, the maximum amount the firm will be willing to pay is $10,252.32.
Want to see more full solutions like this?
Chapter 19 Solutions
EBK FUNDAMENTALS OF CORPORATE FINANCE A
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education