CHAPTER 10: LESSONS FROM MARKET HISTORY

1. Suppose a stock had an initial price of $74 per share, paid a dividend of $1.65 per share during
the year, and had an ending share price of $83. Compute the percentage total return.

2. Using the following returns, calculate the arithmetic average returns, the variances, and the
standard deviations for X and Y:

3. You’ve observed the following returns on Pine Computers’s stock over the past five years: 8
percent, −12 percent, 14 percent, 21 percent, and 16 percent.
a. What was the arithmetic average return on the company’s stock over this 5-year period?
b. What was the variance of the company’s returns over this period? The standard deviation?
4. In previous problem, suppose the average inflation rate over this period was 3.1 percent and
the average T-bill rate over the period was 3.9 percent.
a. What was the average real return on the company’s stock?
b. What was the average nominal risk premium on the company’s stock?

5. A stock has had returns of 12.79, 9.21, 14.68, 21.83, and −10.34 percent over the past five
years, respectively. What was the holding period return for the stock?

6. You purchased a zero coupon bond one year ago for $286.40. The market interest rate is now
6.1 percent. If the bond had 21 years to maturity when you originally purchased it, what was
your total return for the past year? Assume semiannual compounding.

7. You find a certain stock that had returns of 18 percent, −23 percent, 16 percent, and 9 percent
for four of the last five years. If the average return of the stock over this period was 10.5 percent,
what was the stock’s return for the missing year? What is the standard deviation of the stock’s
returns?
8. You bought one of Cobalt Co.’s 4.9 percent coupon bonds one year ago for $1,008.50. These
bonds make annual payments and mature six years from now. Suppose you decide to sell your
bonds today when the required return on the bonds is 4.25 percent. If the inflation rate was 2.7
percent over the past year, what would be your total real return on the investment?

CHAPTER 11: RISK, RETURN, AND CAPM

1. What are the portfolio weights for a portfolio that has 145 shares of Stock A that sell for $47
per share and 200 shares of Stock B that sell for $21 per share?

2. You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected
return of 12.4 percent and Stock Y with an expected return of 10.1 percent. If your goal is to
create a portfolio with an expected return of 10.85 percent, how much money will you invest in
Stock X? In Stock Y?
3. Based on the following information, calculate the expected return and standard deviation for
Stock A and Stock B:

4. A portfolio is invested 45 percent in Stock G, 40 percent in Stock J, and 15 percent in Stock K.

The expected returns on these stocks are 11 percent, 9 percent, and 15 percent, respectively.
What is the portfolio’s expected return? How do you interpret your answer?

5. Consider the following information:

a. Your portfolio is invested 30 percent each in A and C and 40 percent in B. What is the
expected return of the portfolio?
b. What is the variance of this portfolio? The standard deviation?
6. You own a stock portfolio invested 15 percent in Stock Q, 20 percent in Stock R, 30 percent in
Stock S, and 35 percent in Stock T. The betas for these four stocks are .79, 1.23, 1.13, and 1.36,
respectively. What is the portfolio beta?

7. A stock has an expected return of 11.4 percent, the risk-free rate is 3.9 percent, and the market
risk premium is 6.8 percent. What must the beta of this stock be?

8. A stock has an expected return of 11.85 percent, its beta is 1.08, and the risk-free rate is 3.9
percent. What must the expected return on the market be?

9. A stock has an expected return of 10.45 percent, its beta is .85, and the
expected return on the market is 11.8 percent. What must the risk-free rate be?

10. A stock has a beta of 1.19 and an expected return of 12.4 percent. A risk-free asset currently
earns 2.7 percent.
a. What is the expected return on a portfolio that is equally invested in the two assets?
b. If a portfolio of the two assets has a beta of .92, what are the portfolio weights?
c. If a portfolio of the two assets has an expected return of 10 percent, what is its beta?
d. If a portfolio of the two assets has a beta of 2.38, what are the portfolio weights?
How do you interpret the weights for the two assets in this case? Explain.
11. Consider the following information about three stocks:

a. If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the
portfolio expected return? The variance? The standard deviation?
b. If the expected T-bill rate is 3.70 percent, what is the expected risk premium on the portfolio?
c. If the expected inflation rate is 3.30 percent, what are the approximate and exact expected real
returns on the portfolio? What are the approximate and exact expected real risk premiums on the
portfolio?

12. You want to create a portfolio equally as risky as the market and you have $1 million to
invest. Given this information, fill in the rest of the following table:
13. Security F has an expected return of 9 percent and a standard deviation of 43 percent per
year. Security G has an expected return of 12 percent and a standard deviation of 76 percent per
year.
a. What is the expected return on a portfolio composed of 40 percent of Security F and 60
percent of Security G?
b. If the correlation between the returns of Security F and Security G is .25, what is the standard
deviation of the portfolio described in part (a)?

CHAPTER 13: RISK, COST OF CAPITAL, AND VALUATION

1. The Swanson Corporation’s common stock has a beta of 1.07. If the risk-free rate is 3.4
percent and the expected return on the market is 11 percent, what is the company’s cost of equity
capital?

2. Jiminy’s Cricket Farm issued a 30-year, 4.5 percent semiannual bond three years ago. The
bond currently sells for 104 percent of its face value. The company’s tax rate is 22 percent.
Suppose the book value of the debt issue is $75 million. In addition, the company has a second
debt issue on the market, a zero coupon bond with eight years left to maturity; the book value of
this issue is $30 million, and the bonds sell for 81 percent of par. What is the company’s total
book value of debt? The total market value? What is your best estimate of the aftertax cost of
debt now?
3. Mullineaux Corporation has a target capital structure of 70 percent common stock and 30
percent debt. Its cost of equity is 11.3 percent and the cost of debt is 5.9 percent. The relevant tax
rate is 23 percent. What is the company’s WACC?

4. Fama’s Llamas has a weighted average cost of capital of 8.4 percent. The company’s cost of
equity is 11 percent, and its pretax cost of debt is 5.8 percent. The tax rate is 25 percent. What is
the company’s target debt-equity ratio?

5. Dani Corp. has 5.5 million shares of common stock outstanding. The current share price is
$83, and the book value per share is $5. The company also has two bond issues outstanding. The
first bond issue has a face value of $80 million, a coupon rate of 5.5 percent, and sells for 109
percent of par. The second issue has a face value of $45 million, a coupon rate of 5.8 percent,
and sells for 108 percent of par. The first issue matures in 21 years, the second in 6 years. Both
bonds make semiannual coupon payments.
a. What are the company’s capital structure weights on a book value basis?
b. What are the company’s capital structure weights on a market value basis?
c. Which are more relevant, the book or market value weights? Why?
6. In the previous problem, suppose the most recent dividend was $3.85 and the dividend growth
rate is 5 percent. Assume that the overall cost of debt is the weighted average of that implied by
the two outstanding debt issues. The tax rate is 21 percent. What is the company’s WACC?

7. Given the following information for Huntington Power Co., find the WACC. Assume the
company’s tax rate is 21 percent.
8. The Saunders Investment Bank has the following financing outstanding. What is the WACC
for the company?

9. Ginger Industries stock has a beta of 1.08. The company just paid a dividend of $.85, and the
dividends are expected to grow at 4 percent. The expected return on the market is 11.3 percent,
and Treasury bills are yielding 3.4 percent. The most recent stock price for the company is $72.
a. Calculate the cost of equity using the DDM.
b. Calculate the cost of equity using the CAPM.
c. Why do you think your estimates in (a) and (b) are so different?
FOW
1. What is the cost of equity for a firm that has a beta of 1.35 if the risk-free rate of return is 1.7
percent and the expected market return is 14.2 percent?

2. Johnson and Johnson Co. is expected to pay an annual dividend of $2.8 per share one year
from now with future increases of 1.3 percent annually. The stock currently sells for $18.2 a
share. What is the cost of equity?

3. Josh Ltd. has debt outstanding with a coupon rate of 9 percent and a yield to maturity of 5.2
percent. What is the after-tax cost of debt if the tax rate is 28 percent? Assume all interest is tax
deductible.

4. The New Playground pays an annual dividend of $5.68 on its preferred stock. What is the cost
of preference stock if the stock currently sells for $38.6 a share and the tax rate is 30 percent?

5. Lily Pty Ltd. has a yield to maturity on its debt of 9.3 percent, a cost of equity of 10.2 percent,
and a cost of preferred stock of 9 percent. The firm has 240 shares of common stock outstanding
at a market price of $40 a share. There are 54 shares of preferred stock outstanding at a market
price of $58 a share. The bond issue has a total face value of $1,000 and sells at 94 percent of
face value. If the tax rate is 30 percent, what is the weighted average cost of capital?
6. At the current market price of $40 per share, Hemiphere Co. has 250 outstanding shares of
ordinary stock. With a dividend growth rate of 6%, the company recently paid an annual
dividend of $2.8 per share. Additionally, the company is selling 15 existing bonds, each having a
$1,000 face value, for 91 percent of par. The bonds offer a 8.3 percent yield to maturity and a 6
percent coupon rate. It is tax deductible on all interest. What is the weighted average cost of
capital if the tax rate is 25%?

7. Hoa Florist wants to have a weighted average cost of capital of 12.6 percent. The firm has an
aftertax cost of debt of 8.4 percent and a cost of equity of 15.9 percent. What debt-equity ratio is
needed for the firm to achieve its targeted weighted average cost of capital?

8. The Super Future Co. has 1.4 million shares of stock outstanding. The stock currently sells for
$20 per share. The firm’s debt is publicly traded and was recently quoted at 93 percent of face
value. It has a total face value of $5 million, and it is currently priced to yield 11 percent. The
risk-free rate is 8 percent, and the market risk premium is 7 percent. You’ve estimated that the
company has a beta of .74. If the corporate tax rate is 34 percent, what is the WACC?
 CHAPTER 16: CAPITAL STRUCTURE
1. Fujita, Inc., has no debt outstanding and a total market value of $222,000. Earnings before
interest and taxes, EBIT, are projected to be $18,000 if economic conditions are normal. If there
is strong expansion in the economy, then EBIT will be 25 percent higher. If there is a recession,
then EBIT will be 30 percent lower. The company is considering a $60,000 debt issue with an
interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are
currently 7,400 shares outstanding. Ignore taxes for this problem. Assume the stock price is
constant under all scenarios.
a. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt
is issued. Also calculate the percentage changes in EPS when the economy expands or enters a
recession.
b. Repeat part (a) assuming that the company goes through with recapitalization. What do you
observe?
2. Repeat parts (a) and (b) in Problem 1 assuming the company has a tax rate of 21 percent, a
market-to-book ratio of 1.0, and the stock price remains constant.
3. Suppose the company in Problem 1 has a market-to-book ratio of 1.0 and the stock price
remains constant.
a. Calculate return on equity, ROE, under each of the three economic scenarios before any debt
is issued. Also calculate the percentage changes in ROE for economic expansion and recession,
assuming no taxes.
b. Repeat part (a) assuming the firm goes through with the proposed recapitalization.
c. Repeat parts (a) and (b) of this problem assuming the firm has a tax rate of 21 percent.
4. Foundation Corporation is comparing two different capital struc tures, an all-equity plan (Plan
I) and a levered plan (Plan II). Under Plan I, the company would have 145,000 shares of stock
outstanding. Under Plan II, there would be 125,000 shares of stock outstanding and $716,000 in
debt outstanding. The interest rate on the debt is 8 percent and there are no taxes.
a. If EBIT is $300,000, which plan will result in the higher EPS?
b. If EBIT is $600,000, which plan will result in the higher EPS?
c. What is the break-even EBIT?

5. Dickson Corp. is comparing two different capital structures. Plan I would result in 12,700
shares of stock and $100,050 in debt. Plan II would result in 9,800 shares of stock and $226,200
in debt. The interest rate on the debt is 10 percent.
a. Ignoring taxes, compare both of these plans to an all-equity plan assuming EBIT will be
$70,000. The all-equity plan would result in 15,000 shares of stock outstanding. Which of the
three plans has the highest EPS? The lowest?
b. In part (a) what are the break-even levels of EBIT for each plan as compared to that for an
all-equity plan? Is one higher than the other? Why?
c. Ignoring taxes, when will EPS be identical for Plans I and II?
d. Repeat parts (a), (b), and (c) assuming that the corporate tax rate is 21 percent. Are the
break-even levels of EBIT different from before? Why or why not?
6. Finch, Inc., is debating whether or not to convert its all-equity capital structure to one that is
30 percent debt. Currently there are 6,500 shares outstanding and the price per share is $51.
EBIT is expected to remain at $41,000 per year forever. The interest rate on new debt is 8
percent and there are no taxes.
a. Allison, a shareholder of the firm, owns 100 shares of stock. What is her cash flow under the
current capital structure, assuming the firm has a dividend payout rate of 100 percent?
b. What will Allison’s cash flow be under the proposed capital structure of the firm? Assume that
she keeps all 100 of her shares.
c. Suppose the company does convert, but Allison prefers the current all-equity capital structure.
Show how she could unlever her shares of stock to recreate the original capital structure.
d. Using your answer to part (c), explain why the company’s choice of capital structure is
irrelevant.
7. ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure.
ABC is all-equity financed with $680,000 in stock. XYZ uses both stock and perpetual debt; its
stock is worth $340,000 and the interest rate on its debt is 7 percent. Both firms expect EBIT to
be $67,000. Ignore taxes.
a. Rico owns $41,500 worth of XYZ’s stock. What rate of return is he expecting?
b. Show how Rico could generate exactly the same cash flows and rate of return by investing in
ABC and using homemade leverage.
c. What is the cost of equity for ABC? What is it for XYZ?
d. What is the WACC for ABC? For XYZ? What principle have you illustrated?
8. Navarro Corp. has no debt but can borrow at 5.9 percent. The firm’s WACC is currently 9.20
percent and the tax rate is 21 percent.
a. What is the company’s cost of equity?
b. If the company converts to 25 percent debt, what will its cost of equity be?
c. If the company converts to 50 percent debt, what will its cost of equity be?
d. What is the company’s WACC in part (b)? In part (c)?

10. Fields & Co. expects its EBIT to be $125,000 every year forever. The company can borrow
at 7 percent. The company currently has no debt and its cost of equity is 12 percent. If the tax
rate is 24 percent, what is the value of the company? What will the value be if the company
borrows $205,000 and uses the proceeds to repurchase shares?

11. In Problem 9, what is the cost of equity after recapitalization? What is the WACC? What are
the implications for the firm’s capital structure decision?
12. Levered, Inc., and Unlevered, Inc., are identical in every way except their capital structures.
Each company expects to earn $16 million before interest per year in perpetuity, with each
company distributing all its earnings as dividends. Levered’s perpetual debt has a market value
of $60 million and costs 8 percent per year. Levered has 1.8 million shares of stock outstanding
that sell for $101 per share. Unlevered has no debt and 3.4 million shares outstanding, currently
worth $72 per share. Neither firm pays taxes. Is Levered’s stock a better buy than Unlevered’s
stock?

13. Tool Manufacturing has an expected EBIT of $57,000 in perpetuity and a tax rate of 21
percent. The firm has $134,000 in outstanding debt at an interest rate of 5.35 percent and its
unlevered cost of capital is 10.3 percent. What is the value of the company according to MM
Proposition I with taxes? Should the company change its debt-equity ratio if the goal is to
maximize the value of the company? Explain.
14. Tempest Corporation expects an EBIT of $37,700 every year forever. The company currently
has no debt and its cost of equity is 11 percent. The tax rate is 22 percent.
a. What is the current value of the company?
b. Suppose the company can borrow at 6 percent. What will the value of the company be if it
takes on debt equal to 50 percent of its unlevered value? What if it takes on debt equal to 100
percent of its unlevered value?
c. What will the value of the company be if it takes on debt equal to 50 percent of its levered
value? What if the company takes on debt equal to 100 percent of its levered value?

15. The Bellwood Company is financed entirely with equity. The company is considering a loan
of $3.4 million. The loan will be repaid in equal installments over the next two years and has an
interest rate of 8 percent. The company’s tax rate is 24 percent. According to MM Proposition I
with taxes, what would be the increase in the value of the company after the loan?
16. Joylin, Inc., has equity with a market value of $15.4 million and debt with a market value of
$5.9 million. Treasury bills that mature in one year yield 4 percent per year and the expected
return on the market portfolio is 11 percent. The beta of the company’s equity is 1.15. The firm
pays no taxes.
a. What is the company’s debt-equity ratio?
b. What is the firm’s weighted average cost of capital?
c. What is the cost of capital for an otherwise identical all-equity firm?
17. Dickson, Inc., has a debt-equity ratio of 2.3. The firm’s weighted average cost of capital is 9
percent and its pretax cost of debt is 5.3 percent. The tax rate is 24 percent.
a. What is the company’s cost of equity capital?
b. What is the company’s unlevered cost of equity capital?
c. What would the company’s weighted average cost of capital be if the firm’s debt- equity ratio
were .75? What if it were 1.3?
FOW
1. New Era Corporation is comparing two different capital structures, an all-equity plan (Plan I)
and a levered plan (Plan II). Under Plan I, the company would have 200,000 shares of stock
outstanding. Under Plan II, there would be 120,000 shares of stock outstanding and $1 million in
debt outstanding. The interest rate on the debt is 10 percent and there are no taxes.
a. If EBIT is $120,000, what is the EPS for each plan?
b. If EBIT is $950,000, what is the EPS for each plan?
c. What is the break-even EBIT?

2. Schneider is comparing two different capital structures, an all-equity plan (Plan I) and a
levered plan (Plan II). Under Plan I, the company would have 280,000 shares of stock
outstanding. Under Plan II, there would be 190,000 shares of stock outstanding and $4.5 million
in debt outstanding. The interest rate on the debt is 8 percent and there are no taxes.
a. If EBIT is $800,000, which plan will result in the higher EPS?
b. If EBIT is $1,500,000, which plan will result in the higher EPS?
c. What is the break-even EBIT?
3. Milton Investment has an all-equity capital structure. Its characteristics are as follows:
-​ The expected operating income is $6,000.
-​ The cost of equity is 12%.
-​ EBIT is perpetual.
-​ Milton is planning to issue $18,000 in debt at 6% to buy back $18,000 worth of its equity.
-​ There is no corporation tax
a. Find the WACC of Milton before restructuring and give comment
b. Calculate the value of Milton before restructuring
c. Find the cost of equity and WACC after restructuring

4. Milton Investment has an all-equity capital structure. Its characteristics are as follows:
-​ The expected operating income is $6,000.
-​ The cost of equity is 12%.
-​ EBIT is perpetual.
-​ Milton is planning to issue $18,000 in debt at 6% to buy back $18,000 worth of its equity.
-​ The corporation tax is 35%
a. Find the value of Milton before and after restructuring
b. Find the cost of equity and WACC after restructuring
c. Do the same, but now Milton is planning to issue $25,000 in debt at 6% to buy back $25,000
worth of its equity and give a comment
 CHAPTER 21: LEASING
1. Assume that the tax rate is 21 percent. You can borrow at 8 percent before taxes. Should you
lease or buy?

2. What are the cash flows from the lease from the lessor’s viewpoint? Assume a 21 percent tax
rate.

3. What would the lease payment have to be for both the lessor and the lessee to be indifferent
about the lease?

4. Assume that your company does not contemplate paying taxes for the next several years. What
are the cash flows from leasing in this case?
5. In the previous question, over what range of lease payments will the lease be profitable for
both parties?

6. Rework Problem 1 assuming that the scanner will be depreciated as 3-year property under
MACRS (see Chapter 6 for the depreciation allowances).

7. Kaleidescope Entertainment is considering buying a machine that costs $625,000. The

machine will be depreciated over five years by the straight-line method and will be worthless
after five years. The company can lease the machine with year-end payments of $155,000. The
company can issue bonds at an interest rate of 7 percent. If the corporate tax rate is 21 percent,
should the company buy or lease?
8. Quartz Corporation is a relatively new firm. Quartz has experienced enough losses during its
early years to provide it with at least eight years of tax loss carryforwards, so Quartz’s effective
tax rate is zero. Quartz plans to lease equipment from New Leasing Company. The term of the
lease is five years. The purchase cost of the equipment is $725,000. New Leasing Company is in
the 23 percent tax bracket. Each firm can borrow at 9 percent.
a. What is Quartz’s reservation price?
b. What is New Leasing Company’s reservation price?
c. Explain why these reservation prices determine the negotiating range of the lease.

9-10. The Wildcat Oil Company is trying to decide whether to lease or buy a new
computer-assisted drilling system for its oil exploration business. Management has decided that
it must use the system to stay competitive; it will provide $2.8 million in annual pretax cost
savings. The system costs $8.78 million and will be depreciated straight-line to zero over five
years. Wildcat’s tax rate is 21 percent and the firm can borrow at 7 percent. Lambert Leasing
Company has offered to lease the drilling equipment to Wildcat for payments of $1.95 million per
year. Lambert’s policy is to require its lessees to make payments at the start of the year
9. What is the NAL for Wildcat? What is the maximum lease payment that would be acceptable
to the company?
10. Suppose it is estimated that the equipment will have an aftertax residual value of $900,000 at
the end of the lease. What is the maximum lease payment acceptable to Wildcat now?

11. An asset costs $825,000 and will be depreciated in a straight-line manner over its three-year
life. It will have no salvage value. The corporate tax rate is 22 percent and the appropriate
interest rate is 7 percent.
a. What set of lease payments will make the lessee and the lessor equally well off?
b. Show the general condition that will make the value of a lease to the lessor the negative of the
value to the lessee.
c. Assume that the lessee pays no taxes and the lessor is in the 22 percent tax bracket. For what
range of lease payments does the lease have a positive NPV for both parties?
12. Wolfson Corporation has decided to purchase a new machine that costs $2.1 million. The
machine will be depreciated on a straight-line basis and will be worthless after four years. The
corporate tax rate is 24 percent. The Sur Bank has offered Wolfson a four-year loan for $2.1
million. The repayment schedule is four yearly principal repayments of $525,000 and an interest
charge of 9 percent on the outstanding balance of the loan at the beginning of each year. Both
principal repayments and interest are due at the end of each year. Cal Leasing Corporation offers
to lease the same machine to Wolfson. Lease payments of $640,000 per year are due at the
beginning of each of the four years of the lease.
a. Should Wolfson lease the machine or buy it with bank financing?
b. What is the annual lease payment that will make Wolfson indifferent to whether it leases the
machine or purchases it?

13. An asset costs $745,000 and will be depreciated in a straight-line manner over its three-year
life. It will have no salvage value. The lessor can borrow at 6 percent and the lessee can borrow
at 9 percent. The corporate tax rate is 21 percent for both companies.
a. How does the fact that the lessor and lessee have different borrowing rates affect the
calculation of the NAL?
b. What set of lease payments will make the lessee and the lessor equally well off?
c. Assume that the lessee pays no taxes and the lessor is in the 21 percent tax bracket. For what
range of lease payments does the lease have a positive NPV for both parties?
 CHAPTER 26: SHORT‐TERM FINANCE AND PLANNING
1. The Morning Jolt Coffee Company has projected the following quarterly sales amounts for the
coming year:

a. Accounts receivable at the beginning of the year are $335. The company has a 45-day
collection period. Calculate cash collections in each of the four quarters by completing the
following:

b. Rework part (a) assuming a collection period of 60 days.

c. Rework part (a) assuming a collection period of 30 days.
2. Consider the following financial statement information for the Newk Corporation:

Calculate the operating and cash cycles. How do you interpret your answer?

3. Sexton Products has projected the following sales for the coming year:

Sales in the year following this one are projected to be 15 percent greater in each quarter.
a. Calculate payments to suppliers assuming that the company places orders during each quarter
equal to 30 percent of projected sales for the next quarter. Assume that the company pays
immediately. What is the payables period in this case?
b. Rework part (a) assuming a 90-day payables period.
c. Rework part (a) assuming a 60-day payables period.
4. The Bandon Pine Corporation’s purchases from suppliers in a quarter are equal to 75 percent
of the next quarter’s forecast sales. The payables period is 60 days. Wages, taxes, and other
expenses are 20 percent of sales, and interest and dividends are $110 per quarter. No capital
expenditures are planned. Here are the projected quarterly sales:

Sales for the first quarter of the following year are projected at $1,950. Calculate the company’s
cash outlays by completing the following:
5. The following is the sales budget for Lemonis, Inc., for the first quarter of 2022:

Credit sales are collected as follows:

-​ 65 percent in the month of the sale.
-​ 20 percent in the month after the sale.
-​ 15 percent in the second month after the sale.
The accounts receivable balance at the end of the previous quarter was $81,000 ($59,000 of
which were uncollected December sales).
a. Compute the sales for November.
b. Compute the sales for December.
c. Compute the cash collections from sales for each month from January through March.
6. Here are some important figures from the budget of Nashville Nougats, Inc., for the second
quarter of 2022:

The company predicts that 5 percent of its credit sales will never be collected, 35 percent of its
sales will be collected in the month of the sale, and the remaining 60 percent will be collected in
the following month. Credit purchases will be paid in the month following the purchase.
In March 2022, credit sales were $245,300 and credit purchases were $149,300. Using this
information, complete the following cash budget:
7. The sales budget for your company in the coming year is based on a quarterly growth rate of
10 percent, with the first-quarter sales projection at $165 million. In addition to this basic trend,
the seasonal adjustments for the four quarters are, in millions, 0, −$12, −$6, and $18,
respectively. Generally, 50 percent of the sales can be collected within the quarter and 45 percent
in the following quarter; the rest of the sales are bad debt. The bad debts are written off in the
second quarter after the sales are made. The beginning accounts receivable balance is $84
million. Assuming all sales are on credit, compute the cash collections from sales for each
quarter.