Sluggo, Inc. Makers of the World's Best 9-inch Nails Financials
(in thousands): ASSETS: Cash $500; Inventory $100; Accounts
Receivables $200; Plant & Equipment $2000, Depreciation $200;
Land $2000, Goodwill $100, Trademark $100 LIABILITIES: Current
Liabilities $50; Long-Term Liabilities $1650 Gross income for 2020
is $1500 (all credit sales); COGS is $400, Administrative and
General expenses are $400, Sluggo pays 4% interest on its
liabilities and its corporate tax rate is 20%. Capital
Improvement: Sluggo wants to build a factory which would produce
the steel for the 9-inch nails. The initial cash outlay is $1000,
the factory is expected to be productive for 5 years, the required
rate of return is 5%, and the free cash flow each year is expected
to be $250. Capital Structure: Currently, when Sluggo finances a
capital improvement, it uses: bonds (debt) and raises 35% of raised
money in debt; common stock where 60% of raised money is from
retained earnings, and 5% of raised capital is from preferred
stock. Capital structure: 35% bonds, 60% common stock, 5% preferred
stock. Bonds: 10-year, 4% coupon, market value is $975, corporate
tax rate is 20% Common stock: Beta of 1.25, risk-free rate of 2%,
market risk of 9% Preferred stock: Par value of $100.00, dividend
rate is 10%, market value of $100.00 Because Sluggo wants to be
efficient when ordering the steel to make the 9-inch nails, it
needs to calculate the efficient order quantity (EOQ) and the total
inventory cost (TIC). It sells 50,000 9-inch nails each year, the
carrying costs are 30% of the product price of $5, and the supplier
always charges a $250 delivery charge for each shipment of steel.
When borrowing short-term cash (a 270-day, 9-month loan), Sluggo
uses commercial paper, that is an unsecured 9-month loan from a
large corporation. If Sluggo's cash conversion cycle is less than
60 days, the APR is 4%. Sluggo may consider raising short-term cash
by selling a 10-year, 4% coupon bond. However, it realizes lenders
will require 6%.
If Sluggo borrows $1000 on a 270-day, 9-month basis, and a 4%
APR:
Using simple interest calculations
What is the PER?
What is the EAR?
What is the APR?
Using the discount interest calculations:
What is the PER?
What is the EAR?
What is the APR?