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Chapter 6
Discussion Questions
6-1. Rapidly expanding sales will require a buildup in assets to support the growth. In
particular, more and more of the increase in current asset will be permanent in nature. A
non-liquidating aggregate stock of current assets will be necessary to allow for floor
displays, multiple items for selection, and other purposes. All of these ‘asset’ investments
can drain the cash resources of the firm.
6-2. If sales and production can be matched, the level of inventory and the amount of current
assets needed can be kept to a minimum; therefore, lower financing costs will be
incurred. Matching sales and production has the advantage of maintaining smaller
amounts of current assets than level production, and therefore less financing costs are
incurred. However, if sales are seasonal or cyclical, workers will be laid off in a declining
sales climate and machinery (capital assets) will be idle. Here lies the tradeoff between
level and seasonal production: Full utilization of capital assets with skilled workers and
more financing of current assets versus unused capacity, training and retraining workers,
with lower financing for current assets.
6-3. A cash budget helps minimize current assets by providing a forecast of inflows and
outflows of cash. It also encourages the development of a schedule as to when inventory
is produced and maintained for sales (production schedule), and accounts receivables are
collected. The cash budget allows us to forecast the level of each current asset and the
timing of the buildup and reduction of each.
6-4. Only a financial manager with unusual insight and timing could design a plan in which
asset buildup and the length of financing terms are perfectly matched. One would need to
know exactly what parts of current assets are temporary and what parts are permanent.
Furthermore, one is never quite sure how much short-term or long-term financing is
available at appropriate rates at all times. Even if this were known, it would be difficult to
change the financing mix on a continual basis.
6-5. By establishing a long-term financing arrangement for temporary current assets, a firm is
assured of having necessary funding in good times as well as bad, thus we say there is
low risk. However long-term financing is generally more expensive than short-term
financing and profits may be lower than those which could be achieved with a
synchronized or normal financing arrangement for temporary current assets. This is
demonstrated in Figure 6-12.
6-6. By financing a portion of permanent current assets on a short-term basis, we run the risk
of inadequate financing in tight money periods. However, since short-term financing is
less expensive than long-term funds, a firm tends to increase its profitability over the long
run (assuming it survives). In answer to the preceding question, we stressed less risk and
less return; here the emphasis is on high risk and high return.
6-7. The term structure of interest rates shows the relative level of short-term and long-term
Foundations of Fin. Mgt. 10Ce 6-1 Block, Hirt, Danielsen, Short, Perretta
Chapter 6
interest rates at a point in time. It is often referred to as a yield curve.
6-8. Liquidity premium theory, the segmentation theory, and the expectations theory:
The liquidity premium theory indicates that long-term rates should be higher than short-
term rates. This premium of long-term rates over short-term rates exists because short-
term securities have greater liquidity, and therefore higher rates have to be offered to
potential long-term bond buyer for enticement to hold these less liquid and more price
sensitive securities.
The segmentation theory states that Treasury securities are divided into market segments
by the various financial institutions investing in the market. The changing needs, desires,
and strategies of these investors tend to strongly influence the nature and relationship of
short- and long-term rates.
The expectations hypothesis maintains that the yields on long-term securities are a
function of short-term rates. The result of the hypothesis is that when long-term rates are
much higher than short-term rates, the market is saying that it expects short-term rates to
rise. When long-term rates are lower than short-term rates, the market is expecting short-
term rates to fall.
6-9. An inverted yield curve reflects investor expectations that interest rates will decline in the
future. Furthermore, an inverted yield curve has usually preceded a recession. Lower
interest rates are generally a reflection of lower inflation and lower inflation is usually the
result of an economic slowdown. This information would be valuable for planning
purposes.
6-10. The factors that could be discussed include inflation, inflationary pressures, monetary
policy and the money supply, fiscal policy (including spending, taxation, and
deficits/debt) and the demand for money, and international influences. A supply/demand
diagram is useful for discussing the impacts.
6-11. Before interest rates drop, a bond trader would like to lock into longer term interest rates.
The trader will see the value of longer term bonds appreciate faster than short term bonds
for a given increase in interest rates. The action of the trader of buying longer term bonds,
relative to short term bonds, will drive their price up and their yields down. The yield
curve will become inverted.
6-12. Normally, short-term rates are much more volatile than long-term rates. This is
demonstrated in Figure 6-12 with a long-run view of interest rates.
6-13. Corporate liquidity has been decreasing since the early 1960s because of more
sophisticated, profit-oriented financial management (at times the profit orientation has
been taken too far). The use of the computer has allowed for more volume being
conducted with smaller cash balances. Also, inflation has forced a diversion of funds
away from liquid assets to handle ever-expanding inventory costs. Likewise decreasing
Chapter 6
profitability during recessions has diverted funds from liquid assets.
Internet Resources and Questions

1. www.bankofcanada.ca/rates/interest-rates
2. www.bloomberg.com/markets/rates-bonds
3. www.rbc.com/economics/economic-reports/financial-market-reports.html
Chapter 6
Problems
6-1. Bondage Supply Company
$750,000 Sales
.10 Profit margin
75,000 Net income
– 22,500 Dividends (30%)
$ 52,500 Increase in retained earnings
$120,000 Increase in assets

– 52,500 Increase in retained earnings
$67,500 External funds needed
6-2. Axle Supply Co.
$300,000 Sales
.08 Profit margin
24,000 Net income
– 4,800 Dividends (20%)
$ 19,200 Increase in retained earnings
$60,000 Increase in assets

– 19,200 Increase in retained earnings
$40,800 External funds needed
Chapter 6
6-3. Garza Electronics
Beginning Ending
Inventory + Production – Sales = Inventory
January 700 + 600 – 500 = 800
February 800 + 600 – 250 = 1,150
March 1,150 + 600 – 1,000 = 750
6-4. Madonna’s Clothiers
a. Units Units Change in Ending

sold produced inventory inventory
October 2,000 5,000 +3,000 3,000
November 4,000 5,000 +1,000 4,000
December 8,000 5,000 –3,000 1,000
January 6,000 5,000 –1,000 0
b. Ending Cost per Financing cost

inventory unit ($7) @ 8%/12
October 3,000 $21,000 $140.00
November 4,000 28,000 186.67
December 1,000 7,000 46.67
January 0 0 0
$373.34
Chapter 6
6-5. Bambino Sporting Goods
a. Units Units Change in Ending

sold produced inventory inventory
March 3,000 7,500 +4,500 4,500
April 7,000 7,500 +500 5,000
May 11,000 7,500 –3,500 1,500
June 9,000 7,500 –1,500 0
b. Ending Cost per Financing cost

inventory unit ($20) @ 6%/12
March 4,500 $ 90,000 $450.00
April 5,000 100,000 500.00
May 1,500 30,000 150.00
June 0 0 0
$1,100.00
Chapter 6
6-6. Front Page Video Games
a. Production and inventory schedule in units

Beginning Ending
1 2
January 20,000 + 11,600 – 19,000 = 12,600
February 12,600 + 11,600 – 17,600 = 6,600
March 6,600 + 11,600 – 4,000 = 14,200
April 14,200 + 11,600 – 4,000 = 21,800
May 21,800 + 11,600 – 3,000 = 30,400
June 30,400 + 11,600 – 6,000 = 36,000
July 36,000 + 11,600 – 8,000 = 39,600
August 39,600 + 11,600 – 8,000 = 43,200
September 43,200 + 11,600 – 10,000 = 44,800
October 44,800 + 11,600 – 16,000 = 40,400
November 40,400 + 11,600 – 20,000 = 32,000
December 32,000 + 11,600 – 23,600 = 20,000
1
Total annual sales = $696,000
$696,000/ $5 per unit = 139,200 units
139,200 units/ 12 months = 11,600 per month
2
Monthly dollar sales/ $5 price = unit sales
Chapter 6
b. Cash Receipts Schedule

January February March April May June
Sales (in dollars) $95,000 $88,000 $20,000 $20,000 $15,000 $30,000
30% cash sales 28,500 26,400 6,000 6,000 4,500 9,000
70% prior month’s
sales 70,000* 66,500 61,600 14,000 14,000 10,500
Total cash receipts $98,500 $92,900 $67,600 $20,000 $18,500 $19,500
*based on December sales of $100,000
July August Sept. October Nov. Dec.

Sales (in dollars) $40,000 $40,000 $50,000 $80,000 $100,000 $118,000
30% cash sales 12,000 12,000 15,000 24,000 30,000 35,400
70% prior month’s
sales 21,000 28,000 28,000 35,000 56,000 70,000
Total cash receipts $33,000 $40,000 $43,000 $59,000 $86,000 $105,400
Chapter 6
c. Cash Payments Schedule

Constant production
11,600 units  $2 $23,200 $23,200 $23,200 $23,200 $23,200 $23,200

Other cash payments 40,000 40,000 40,000 40,000 40,000 40,000
Total cash payments $63,200 $63,200 $63,200 $63,200 $63,200 $63,200

11,600 units  $2 $23,200 $23,200 $23,200 $23,200 $23,200 $23,200
Total cash payments $63,200 $63,200 $63,200 $63,200 $63,200 $63,200
Chapter 6
d. Cash Budget
Net cash flow $35,300 $29,700 $ 4,400 $(43,200) $(44,700) $(43,700)
Beginning cash 5,000 40,300 70,000 74,400 31,200 5,000
Cumulative cash balance 40,300 70,000 74,400 31,200 (13,500) (38,700)
Monthly loan or (repayment) -0- -0- -0- -0- 18,500 43,700
Cumulative loan -0- -0- -0- -0- 18,500 62,200
Ending cash balance 40,300 70,000 74,400 31,200 5,000 5,000
Net cash flow ($30,200) ($23,200) ($20,200) ($4,200) $22,800 $42,200
Beginning cash 5,000 5,000 5,000 5,000 5,000 5,000
Cumulative cash balance (25,200) (18,200) (15,200) 800 27,800 47,200
Monthly loan or (repayment) 30,200 23,200 20,200 4,200 (22,800) (42,200)
Cumulative loan 92,400 115,600 135,800 140,000 117,200 75,000
Ending cash balance 5,000 5,000 5,000 5,000 5,000 5,000
Foundations of Fin. Mgt. 10Ce 6 - 10 Block, Hirt, Danielsen, Short, Perretta

Chapter 6
6-7. Seasonal Products Corporation
a. Production and inventory schedule in units

Beginning Ending
1 2
January 5,000 + 7,000 – 10,000 = 2,000
February 2,000 + 7,000 – 7,500 = 1,500
March 1,500 + 7,000 – 2,500 = 6,000
April 6,000 + 7,000 – 1,500 = 11,500
May 11,500 + 7,000 – 500 = 18,000
June 18,000 + 7,000 – 1,500 = 23,500
July 23,500 + 7,000 – 5,000 = 25,500
August 25,500 + 7,000 – 7,000 = 25,500
September 25,500 + 7,000 – 10,000 = 22,500
October 22,500 + 7,000 – 12,500 = 17,000
November 17,000 + 7,000 – 15,000 = 9,000
December 9,000 + 7,000 – 11,000 = 5,000
1
$168,000 sales/$2 price = 84,000 units
84,000 units/12 months = 7,000 units per month
2
Monthly dollar sales/$2 = number of units

Chapter 6
b. Cash Receipts Schedule (take dollar values from problem statement)

Sales (in dollars) $20,000 $15,000 $ 5,000 $3,000 $1,000 $3,000
20% Cash sales 4,000 3,000 1,000 600 200 600
80% Prior month’s
sales 12,000* 16,000 12,000 4,000 2,400 800
Total receipts $16,000 $19,000 $13,000 $ 4,600 $ 2,600 $ 1,400
*based on December sales of $15,000

Sales (in dollars) $10,000 $14,000 $20,000 $25,000 $ 30,000 $ 22,000
20% Cash sales 2,000 2,800 4,000 5,000 6,000 4,400
80% Prior month’s
sales 2,400 8,000 11,200 16,000 20,000 24,000
Total receipts $ 4,400 $10,800 $15,200 $21,000 $26,000 $ 28,400

Chapter 6
c. Cash Payments Schedule:

Constant production

7,000 units  $1 $ 7,000 $ 7,000 $ 7,000 $ 7,000 $ 7,000 $ 7,000
Total payments $13,000 $13,000 $13,000 $13,000 $13,000 $13,000

7,000 units  $1 $ 7,000 $ 7,000 $ 7,000 $ 7,000 $ 7,000 $ 7,000
Total payments $13,000 $13,000 $13,000 $13,000 $13,000 $13,000

Chapter 6
d. Cash Budget
Cash flow $ 3,000 $ 6,000 $0 ($ 8,400) ($10,400) ($11,600)
Beginning cash 1,000 4,000 10,000 10,000 1,600 1,000
Cumulative cash balance 4,000 10,000 10,000 1,600 (8,800) (10,600)
Monthly loan or (repayment) -0- -0- -0- -0- 9,800 11,600
Cumulative loan -0- -0- -0- -0- 9,800 21,400
Ending cash balance $4,000 $10,000 $10,000 $1,600 $1,000 $1,000

Cash flow ($ 8,600) ($ 2,200) $ 2,200 $8,000 $13,000 $15,400
Beginning cash 1,000 1,000 1,000 1,000 1,000 1,000
Cumulative cash balance (7,600) (1,200) 3,200 9,000 14,000 16,400
Monthly loan or (repayment) 8,600 2,200 (2,200) (8,000) (13,000) (9,000)
Cumulative loan 30,000 32,200 30,000 22,000 9,000 -0-
Ending cash balance $1,000 $1,000 $1,000 $1,000 $1,000 $7,400

Chapter 6
e. Assets
Accounts Total
Cash Receivable Inventory Current
January $ 4,000 $16,000 $ 2,000 $22,000
February 10,000 12,000 1,500 23,500
March 10,000 4,000 6,000 20,000
April 1,600 2,400 11,500 15,500
May 1,000 800 18,000 19,800
June 1,000 2,400 23,500 26,900
July 1,000 8,000 25,500 34,500
August 1,000 11,200 25,500 37,700
September 1,000 16,000 22,500 39,500
October 1,000 20,000 17,000 38,000
November 1,000 24,000 9,000 34,000
December 7,400 17,600 5,000 30,000
The instructor may wish to point out how current assets are at
relatively high levels and illiquid during June through October. In
November and particularly December, the asset levels remain high,
but they become increasingly more liquid as inventory diminishes
relative to cash.

Chapter 6
6-8. Liz’s Health Food Stores
a. Short-term financing
On Monthly Actual
Month Rate Basis Amount Interest
January 8% 0.67% $8,000 $53.33
February 9% 0.75% 2,000 15.00
March 12% 1.00% 3,000 30.00
April 15% 1.25% 8,000 100.00
May 12% 1.00% 9,000 90.00
June 12% 1.00% 4,000 40.00
$328.33
b. Long-term financing
Long-term debt is not variable in the short term. Therefore Liz's

Health Food Store would be required to borrow the highest amount
of financing required based on their estimated monthly
requirements for the duration of the loan.
$9,000.00 X 12% X 6/12 = $540.00

Chapter 6
6-9. Liz’s Health Food Stores (Continued)
Divide the total interest payments in part (a) of $328.33 by the

total amount of funds extended $34,000 and multiply by 12.
interest $328.33
  0.966% monthly rate
principal $34,000
12  .966% = 11.59% annual rate
6-10. Gabriel Health Services Ltd.

Long-term rate: $1,500,000 × 0.05 × 2 years = $150,000
Short-term rate: $1,500,000 × 0.0350 × 1 year = $ 52,500
$1,500,000 × 0.0625 × 1 year = 93,750
$146,250
The short-term rates appear less costly.
6-11. Boatler Used Cadillac Co.

Long-term rate: $850,000 × 0.08 × 3 years = $204,000
Short-term rate: $850,000 × 0.04 × 1 year = $ 34,000
$850,000 × 0.07 × 1 year = $ 59,500
$850,000 × 0.12 × 1 year = 102,000
$195,500
The short-term rate appears less costly.

Chapter 6
6-12. Sauer Food Company

a. If Rates Are Constant
$150,000 borrowed  10% per annum  3 years = $45,000
Interest cost (long-term)
$150,000 borrowed  8% per annum  3 years = 36,000
Interest cost (short-term)
Interest savings if borrowing short-term = $ 9,000
b. If Short-term Rates Change
1st year $150,000  .08 = $12,000
2nd year $150,000  .13 = $19,500
3rd year $150,000  .18 = $27,000
Total = $58,500
$58,500 - $45,000 = $13,500
Extra interest costs by borrowing if the short-term rates are
changing.

Chapter 6
6-13. Sherlock Homes
Long-term financing equals:

Permanent current assets $1,500,000
Capital assets 2,000,000
$3,500,000
Short-term financing equals:
Temporary current assets $1,000,000
Long-term interest expense = 13%  $3,500,000 = $455,000

Short-term interest expense = 8%  $1,000,000 = 80,000
Total interest expense $535,000
Earnings before interest and taxes $960,000
Interest expense 535,000
Earnings before taxes 425,000
Taxes (40%) 170,000
Earnings after taxes $255,000
6-14. Sherlock Homes (Continued)

Short-term interest expense = 12%  1,000,000 = 120,000
Taxes (40%) 224,000
The company has benefited because it is primarily financed by long-term

financing, and long-term rates are now much lower than short-term rates, as
rates have become inverted.

Chapter 6
6-15. Atlas Tours

a. Long-term financing equals:
$4,200,000
Temporary current assets (six months) $1,200,000
Temporary current assets (six months) 400,000
Long-term interest expense = 5%  $4,200,000 = $ 210,000
Short-term interest expense = 4%  $1,200,000  0.5 = 24,000
Short-term interest expense = 4%  $400,000  0.5 = 8,000
Total interest expense $ 242,000
Earnings before interest and taxes $1,080,000
Taxes (38%) 318,440
Earnings after taxes $ 519,560
b. Long-term financing equals:

$4,200,000
Temporary current assets (six months) $1,200,000
Temporary current assets (six months) 400,000
Short-term interest expense = 4%  $1,200,000  0.5 = 24,000
Short-term interest expense = 5%  $400,000  0.5 = 10,000
Taxes (38%) 317,680

Chapter 6
6-16. Collins Systems, Inc.
a. Temporary current assets $300,000

Permanent current assets 200,000
Capital assets 400,000
Total assets $900,000
Conservative
% of Interest Interest
Amount Total Rate Expense
$900,000  .80 = $720,000  .15 = $108,000 Long-term
$900,000  .20 = $180,000  .10 = 18,000 Short-term
Total interest charge $126,000
Aggressive
$900,000  .30 = $270,000 .15 = $40,500 Long-term
$900,000  .70 = $630,000 .10 = 63,000 Short-term
b. Conservative Aggressive
EBIT $180,000 $180,000
– Int. 126,000 103,500
EBT 54,000 76,500
Tax 40% 21,600 30,600
EAT $ 32,400 $ 45,900

Chapter 6
c. Reversed
Conservative
$900,000  .80 = $720,000  .10 = $72,000 Long-term
$900,000  .20 = $180,000  .15 = 27,000 Short-term
Aggressive
$900,000  .30 = $270,000  .10 = $ 27,000 Long-term
$900,000  .70 = $630,000  .15 = 94,500 Short-term
Conservative Aggressive
EBIT $180,000 $180,000
– Int 99,000 121,500
EBT 81,000 58,500
Tax 40% 32,400 23,400
EAT $ 48,600 $ 35,100

Chapter 6
6-17. Lear, Inc.

a. Current assets – permanent current assets = temporary current
assets
$800,000 – $350,000 = $450,000
Long-term interest expense = 10% [$600,000 + ½ ($350,000)]
= 10%  ($775,000)
= $77,500
Short-term interest expense = 5% [$450,000 + ½ ($350,000)]
= 5%  ($625,000)
= $31,250
Total interest expense = $77,500 + $31,250
= $108,750
Taxes (30%) 27,375
b. Alternative financing plan
L. T. interest expense = 10% [$600,000 + $350,000 + ½
($450,000)]
= 10% ($1,175,000)
= $117,500
Short-term interest expense = 5% [½ ($450,000)]
= 5% (225,000)
= $11,250
Total interest expense = $117,500 + $11,250
= $128,750
Interest 128,750
Taxes (30%) 21,375

Chapter 6
c. The alternative financing plan which calls for more financing by

high-cost debt is more expensive and reduces aftertax income by
$14,000. However, we must not automatically reject this plan
because of its higher cost since it has less risk. The alternative
provides the firm with long-term capital which at times will be in
excess of its needs and invested in marketable securities. It will not
be forced to pay higher short-term rates on a large portion of its
debt when short-term rates rise and will not be faced with the
possibility of no short-term financing for a portion of its permanent
current assets when it is time to renew the short-term loan.

Chapter 6
6-18. Date Wireless
a. Long-term financing (as share capital) equals:

$8,000,000
Temporary current assets $1,000,000
Share capital = $8,000,000 ÷ $25 = 320,000

Short-term interest expense = 6%  $1,000,000 = $60,000

Taxes (40%) 376,000
Earnings per share $ 1.76
b. Long-term financing (as share capital) equals:

60% of $9,000,000 (total assets) = $5,400,000
40% of $9,000,000 (total assets) = $3,600,000
Share capital = $5,400,000 ÷ $25 = 216,000
Taxes (40%) 313,600

Chapter 6
c. Short term rates @11%
Hedged
Share capital = $8,000,000 ÷ $25 = 320,000
Taxes (40%) 356,000
Capital structure (40% debt)

Share capital = $5,400,000 ÷ $25 = 216,000

Taxes (40%) 241,600

Chapter 6
6-19. Phu Lighters
a. Long-term financing (50% equity/50% debt) equals:

Permanent current assets $400,000
$3,400,000
Temporary current assets (9 months) $1,350,000
Temporary current assets (3 months) $0
Shares = $3,400,000  0.5 ÷ $10 = 170,000

Long-term interest = 6%  $1,700,000 = $102,000
Short-term interest = 3%  $1,350,000  9/12 = 30,375
Total interest $132,375
Taxes (40%) 195,050
b. Long-term financing (50% equity/50% debt) equals:
80% of $3,000,000 (capital assets) = $2,400,000
$4,750,000 ─ $2,400,000 (9 months) = $2,350,000
$3,400,000 ─ $2,400,000 (3 months) = $1,000,000
Shares = $2,400,000  0.5 ÷ $10 = 120,000
Taxes (40%) 195,050

Chapter 6
c. Short term rates @8%

Long-term financing (50% equity/50% debt):
Shares = $3,400,000  0.5 ÷ $10 = 170,000

Taxes (40%) 174,800
Shares = $2,400,000  0.5 ÷ $10 = 120,000

Long-term interest = 6%  $1,200,000 = $ 72,000
Taxes (40%) 154,800
6-20. Library assignment. Answers will vary with the state of the
economy.

Chapter 6
6-21. Expectations hypothesis
2 year security (4% + 5%)/ 2 = 4.5%

3 year security (4% + 5% + 7%)/ 3 = 5.33%
4 year security (4% + 5% + 7% + 9%)/ 4 = 6.25%
OR:
1.041.05  1  .0450  4.5%

3 1.04 1.05 1.07   1  .0533  5.33%
4 
1.04 1.051.07 1.09  1  0.623  6.23%
2 year bond = 6%
2 year bond = (1st year bond + 2nd year bond) / 2
6% = (5% + f2) / 2
f2 = 7.0%
OR:
(1.06)2 = (1.05) (1 + f2)

1 + f2 = (1.06)2 / 1.05
1 + f2 = 1.0701
f2 = 0.0701
f2 = 7.01%

Chapter 6
1 year rate = 2.60%

2 year rate = 3.26%
3 year rate = 3.39%
2nd year rate = (1st year rate + 2nd year rate) / 2

3.26% = (2.60% + f2) / 2
6.52% = 2.60 + f2
f2 = 3.92%
OR:
(1.0326)2 = (1.0260) (1 + f2)

1 + f2 = (1.0326)2 / 1.0260
1 + f2 = 1.0392
f2 = 0.0392
f2 = 3.92%
3rd year rate = (1st year rate + 2nd year rate + 3rd year rate) / 3
3.39% = (2.60% + 3.92% + f3) / 3
10.17% = 6.52% + f3
f3 = 3.65%
OR:
(1.0339)3 = (1.0260) (1.0392) (1 + f3)

1 + f3 = (1.0339)3 / (1.0260) (1.0392)
1 + f3 = 1.0365
f3 = 0.0365
f3 = 3.65%

Chapter 6
1 year rate = 5.78%

2 year rate = 5.85%
3 year rate = 6.22%
2nd year rate = (1st year rate + 2nd year rate) / 2

5.85% = (5.78% + f2) / 2
11.70% = 5.78% + f2
f2 = 5.92%
OR:
(1.0585)2 = (1.0578) (1 + f2)

1 + f2 = (1.0585)2 / 1.0578
1 + f2 = 1.0592
f2 = 0.0592
f2 = 5.92%
3rd year rate = (1st year rate + 2nd year rate + 3rd year rate) / 3
6.22% = (5.78% + 5.92% + f3) / 3
18.66% = 11.63% + f3
f3 = 6.96%
OR:
(1.0622)3 = (1.0578) (1.0592) (1 + f3)

1 + f3 = (1.0622)3 / (1.0578) (1.0592)
1 + f3 = 1.0696
f3 = 0.0696
f3 = 6.96%

Chapter 6
6-25. Gary’s Pipe and Steel Company

Expected
State of Economy Sales Probability Outcome
Strong $800,000 .20 $160,000
Steady 500,000 .50 250,000
Weak 350,000 .30 105,000
Expected level of sales = $515,000
6-26. Sharpe Knife Company
State of Expected
Economy Sales Probability Outcome
Strong $1,500,000 .20 $300,000
Steady 800,000 .50 400,000
Weak 500,000 .30 150,000
Expected level of sales = $850,000

Chapter 6
6-27. Hogan Surgical Instruments Company
a. Most aggressive
Low liquidity $2,000,000  18% = $360,000
Short-term financing 2,000,000  10% = – 200,000
Anticipated return $160,000
b. Most conservative
High liquidity $2,000,000  14% = $280,000
Long-term financing 2,000,000  12% = – 240,000
Anticipated return $ 40,000
c. Moderate approach
Low liquidity $2,000,000  18% = $360,000
Long-term financing 2,000,000  12% = – 240,000
$120,000
OR:
High liquidity $2,000,000  14% = $280,000
Short-term financing 2,000,000  10% = – 200,000
$ 80,000
d. You may not necessarily select the plan with the highest return. You must
also consider the risk inherent in the plan. Of course, some firms are better
able to take risks than others. The ultimate concern must be for maximizing
the overall valuation of the firm through a judicious consideration of risk-
return options.

Chapter 6
6-28. Atlas Sporting Goods, Inc.
a. Most aggressive
Low liquidity $800,000  15% = $120,000
Short-term financing 800,000  8% = – 64,000
Anticipated return $56,000
b. Most conservative
High liquidity $800,000  12% = $96,000
Long-term financing 800,000  10% = – 80,000
Anticipated return $ 16,000
c. Moderate approach
Low liquidity $800,000  15% = $120,000
Long-term financing 800,000  10% = – 80,000
$40,000
OR:
High liquidity $800,000  12% = $96,000
Short-term financing 800,000  8% = – 64,000
$ 32,000
d. You may not necessarily select the plan with the highest return. You must
also consider the risk inherent in the plan. Of course, some firms are better
able to take risks than others. The ultimate concern must be for maximizing
the overall valuation of the firm through a judicious consideration of risk-
return options.

Chapter 6
Mini Case
Gale Force Corporation
(Working Capital: Level vs., Seasonal Production)
Purpose: This case forces the student to view the impact of level versus
seasonal production on inventory levels, bank loan requirements, and profitability.
It also considers the efficiencies (or inefficiencies) covered by the different
production plans. The computations in the case are parallel Tables 1 to 5 in the
text, with the only difference being that seasonal production rather than level
production is being utilized. The case allows the student to properly track the
movement of cash flow through the production process.
a. New Tables 2 through 5, with Tim’s suggestion implemented, are shown in

the following pages. Observe that the inventory level is now constant at 400
units or $800,000 a month because all units produced are sold. As a side
point, note that there may be no apparent need now to maintain the 400 units
a month in inventory that were on hand at the start of the cycle. The
inventory level could be reduced to the level that management feels would
be sufficient to cover emergencies (or maybe to zero, which is what the
Japanese do in a “just-in-time” production concept).
Though not required, you may wish to refer to the old and new Table 4 to
make a special point. Note that Tim’s suggestion causes inventory balances
to decrease over the time period and total current assets to fluctuate less, but
the same balances occur at the end of September for inventory and total
current assets.
b. New Table 5 shows the new cumulative loan balances and the interest
expenses incurred each month. Under the old system (level production), total
interest expense (at 1% a month on the cumulative loan balance) was
$254,250. Under the proposed system it decreases to $50,750 for a savings
of $203,500.
c. The first step is to compute total sales. Using the second row of Table 3
(either the old or new table), the total is $14,400,000. With an added expense
burden of 0.5%, expenses will go up by $72,000. This is still far less than the
interest savings of $203,500 computed in question 2, so the seasonal
production plan is justified. ($203,500 – $72,000 = $131,500). Please note
that the values are assumed to be computed on a pretax basis.

Chapter 6
Table 2: Production schedule and inventory (seasonal production)
Beginning Ending
October 400 + 150 – 150 = 4001
November 400 + 75 – 75 = 400
December 400 + 25 – 25 = 400
January 400 + 0 – 0 = 400
February 400 + 0 – 0 = 400
March 400 + 300 – 300 = 400
April 400 + 500 – 500 = 400
May 400 + 1,000 – 1,000 = 400
June 400 + 1,000 – 1,000 = 400
July 400 + 1,000 – 1,000 = 400
August 400 + 500 – 500 = 400
September 400 + 250 – 250 = 400
1
Inventory ($2,000 per unit) × 400 = $800,000

Chapter 6
Table 3: Cash Receipts Schedule: (sales price = $3,000/ unit) (in thousands)
October November December January February March
Sales forecast 150 75 25 0 0 300
Sales (in dollars) $450.0 $ 225.0 $75.0 -0- -0- $ 900.0
50% Cash sales 225.0 112.5 37.5 -0- -0- 450.0
50% Prior month’s
sales * 375.0 225.0 112.5 37.5 -0- -0-
Total receipts $600.0 $ 337.5 $ 150.0 $ 37.5 $-0- $ 450.0
*based on September sales of $750,000
April May June July August September
Sales forecast 500 1,000 1,000 1,000 500 250
Sales (in dollars) $1,500.0 $3,000.0 $3,000.0 $ 3,000.0 $1,500.0 $750.0
50% Cash sales 750.0 1,500.0 1,500.0 1,500.0 750.0 375.0
50% Prior month’s
sales 450.0 750.0 1,500.0 15,00.0 1,500.0 750.0
Total receipts $1,200.0 $2,250.0 $3,000.0 $3,000.0 $2,250.0 $1,125.0

Chapter 6
Table 3: Cash Payments Schedule: (Production costs = $2,000/ unit) (in thousands)
Production in units 150 75 25 0 0 300
Production costs $ 300.0 $ 150.0 $ 50.0 $ 0.0 $ 0.0 $ 600.0
Overhead 200.0 200.0 200.0 200.0 200.0 200.0
Dividends & Interest
Taxes 150.0 $ 150.0
Total payments $ 650.0 $ 350.0 $ 250.0 $ 350.0 $ 200.0 $ 800.0

Production in units 500 1,000 1,000 1,000 500 250
Production costs $1,000.0 $2,000.0 $2,000.0 $2,000.0 $1,000.0 $ 500.0
Overhead 200.0 200.0 200.0 200.0 200.0 200.0
Dividends & Interest 1,000.0
Taxes $ 150.0 300.0
Total payments $1,350.0 $2,200.0 $2,200.0 $2,500.0 $2,200.0 $ 700.0

Chapter 6
Table 3: Cash Budget: (minimum required balance = $125,000) (in thousands)

Cash flow $ -50.0 $ -12.5 $ -100.0 $ -312.5 $ -200.0 $ -350.0
Beginning cash 125.0 125.0 125.0 125.0 125.0 125.0
Cumulative cash balance 75.0 112.5 25.0 -187.5 -75.0 -225.0
Monthly loan (repayment) 50.0 12.5 100.0 312.5 200.0 350.0
Cumulative loan 50.0 62.5 162.5 475.0 675.0 1,025.0
Ending cash balance $ 125.0 $ 125.0 $ 125.0 $ 125.0 $ 125.0 $ 125.0
Cash flow $ -150.0 $ 50.0 $ 800.0 $ 500.0 $ 50.0 $ 425.0
Beginning cash 125.0 125.0 125.0 125.0 300.0 350.0
Cumulative cash balance -25.0 175.0 925.0 625.0 350.0 775.0
Monthly loan (repayment) 150.0 -50.0 -800.0 -325.0 -0- -0-
Cumulative loan 1,175.0 1,125.0 325.0 -0- -0- -0-
Ending cash balance $ 125.0 $ 125.0 $ 125.0 $ 300.0 $ 350.0 $ 775.0

Chapter 6
Table 4: Total Current Assets, First Year

*Accounts Total
Cash Receivable Inventory Current
October $125.0 $ 225.0 $800 $1,150.0
November 125.0 112.5 800 1,037.5
December 125.0 37.5 800 962.5
January 125.0 0 800 925.0
February 125.0 0 800 925.0
March 125.0 450.0 800 1,375.0
April 125.0 750.0 800 1,675.0
May 125.0 1,500.0 800 2,425.0
June 125.0 1,500.0 800 2,425.0
July 300.0 1,500.0 800 2,600.0
August 350.0 750.0 800 1,900.0
September 775.0 375.0 800 1,950.0
*Equals 50 percent of monthly sales

Chapter 6
Table 5: Cumulative Loan Balance and Interest Expense (12% per year OR 1% per month)

Cumulative loan (thousands) $50.0 $62.5 $162.5 $475.0 $675.0 $1,025.0
Interest expense at 12% $ 500 $ 625 $1,625 $4,750 $6,750 $10,250

Cumulative loan (thousands) $1,175.0 $1,125.0 $325.0 -0- -0- -0-
Interest expense at 12% $11,750 $11,250 $3,250 $0 $0 $0
Interest rate = 12%

Total interest expense for the year = $50,750

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“I would like to have a drink of good, cold water. I am a deal of
trouble, am I not?”
“If I were sick I would like some one to wait upon me,” I said, and
ran down stairs.—Ann was at the end of the garden, picking berries;
so I drew the water myself; and as I brought the bucket up to the
curb, the woman of Samaria came into my mind. If I could give any
such comfort of living water! Did I really desire to? So far I had done
barely what was required of me. It did not look half as enchanting as
reading to and amusing Miss Lucy Churchill. But wasn’t there a good
work in it as well?
I entered the room with a glass pitcher, through which the water
shone and sparkled. There was such a thirsty, longing look in his
eyes that I was glad to minister to him.
“Thank you a thousand times. I have been wanting that for the last
half hour.”
“Why did you not ring sooner?”
Rose’s Visit to the Invalid. Page 121.
“You had a visitor; and I call for so many things. There appears to
be no end to my wants. I am ashamed of myself. But it is so tiresome
to lie here helpless.”
“What would be the next thing, if I were a fairy?” I asked,
laughingly.
Was it my mood that made him smile?
“There is a tantalizing smell of honeysuckle somewhere about.
Nay, don’t run down stairs again.”
“It is just on the porch.”
Mamma was emptying Miss Churchill’s basket. A bowl of custard,
a jar of wine jelly, fresh eggs, a great, creamy pot-cheese, and the
pears. I just took a whiff of the fragrance and passed on.
“Let me have a piece of it here in my hand.”
“How odd that you should be so fond of flowers!”
“Is it? Sweet blooms only. May be you would not approve of such
a love. I like to crush them and have them about me. Not but what I
admire them in vases, too, but then they do not come into my very
life.”
“Or die for you.”
I had said it, and then I paused in a great tremble, thinking of the
other death that came through love, greater than which hath no man.
“Miss Endicott,” he said, slowly, “are you very religious?”
I colored, and turned my face away; then I thought of “confessing
before men.” What should make me afraid here, except the sense of
personal unworthiness?
“I try a little. I have not gone very far in the way.”
“I know some people who are very religious,” he went on, “and I—
dislike them. That was another reason why I did not want to come
here—because your father was a clergyman. But you always appear
to have such nice, enjoyable times. You talk over everything with him
and your mother.”
“Why should we not? It would be strange if they were not
interested in all that concerns us. And bringing home a bit of
pleasant talk or some bright and amusing incident is like adding a
sheaf to the general granary. Does it not seem as if each one ought
to contribute to the fund of happiness?”
“I suppose it is a good deal in the way you look at it. And the
having a home, may be.”
“Yes,” I said, “that is the great thing, or next to the having a
mother.”
“What if I were seized with a fit of confessing my sins? Would that
be added to the ‘general fund?’”
“I think we have all been brought up to respect a confidence,” I
answered, a trifle wounded. “But it would be better to confess them
to papa.”
“I might not want to;” and he gave a short laugh that did not seem
at all natural. “In fact, there are very few people who suit me, or
attract me—the same can, doubtless, be said of me. Do you know—
and I have never owned it before in my life—I am sometimes jealous
of Stuart? Every one takes to him, likes him; and he is no better than
—other people. He is not always truthful; he is awfully selfish, and
heartless, too. Only he has that sunny, glowing way with him; and
most people are such fools that they cannot see through it. So he
gets credit for sweetness, when it is only—”
“A matter of temperament,” I returned, filling up the long pause.
“Exactly. Why cannot others understand that it is so?”
“Because nearly every one likes roses better than thorns. We
naturally shrink from a rough, prickly outside. No matter if the kernel
is sweet, every one, you know, cannot wait years and years for it to
open. And you seem to shut yourself up—”
“There is nothing to show, so I make no pretence,” he answered,
in a dry, hard tone.—“I hate froth, and all that.”
“Yet I suppose the waterfall is much prettier for the spray and
bubbles. Frail as they are, they reflect many beautiful tints. And I
suppose God could have made apples just as well without such
showers of fragrant blooms, and He may put some people in the
world for the sake of the blossom and the sweetness rather than the
fruit.”
“What an idea! I should think you would be educated to consider
the strictly useful.”
“But all things that God has made have their uses.”
“You keep to the text—that God does it all. It is a woman’s
province to believe, I fancy.”
There was a little sneer in that.
“Does unbelief render men so much happier that they love to cling
to it?” I asked.
“Oh, they are dipping into science and philosophy, and see so
much more of the world,” he replied, loftily.
I turned to the window—and was silent.
“There!” he exclaimed, “I have vexed you.”
“No.” I returned, “I am not vexed. I only wish I knew the right words
to say to you; mamma might.”
“You are all very kind. I wonder that you were so good, when the
beginning was so unpromising. You must have thought us a couple
of brutes.”
“Stuart apologized handsomely to papa.”
“O, I dare say. He is up to that sort of dodge;” and a smile of scorn
curled his thin lip.
“I wish you loved your brothers better,” I could not forbear saying.
“It is their loss, no doubt.”
What could I do with him in such a mood? “Preaching,” as Fan
called it, was useless. Then I bethought myself of Miss Churchill’s
call, and told him what she had brought for him.
“And now,” I said, “it is time you had your supper. You must be
nearly starved.”
With that I ran down stairs. Yes, I did like bright, pleasant people.
Mamma’s cheery ways and papa’s sweetness were worth more than
doses of science and philosophy, since we have to live in a work-day
world, and cannot soar up to the clouds. It is just the every-day being
that is life, not the grand dreams that never come to pass.
I prepared the tray and took it, standing it on a table at the bed’s
side. When I returned the little group were in their accustomed
places, with papa ready to ask the blessing. I slipped quietly into the
circle.
When I went to bring the dishes down I remarked a peculiar
expression upon Louis’ face.
“Miss Rose,” he began, “I want to know how it feels to be
generous; therefore I shall give you a holiday this evening. I must
resolve to stay alone now and then.”
“Are you quite sure—?”
“Quite;” and he waved his hand, smilingly.
I did want to go down to the store with Fan; so I was glad of the
permission. Stuart started to accompany us but two of the village
boys came to call on him. I was relieved, for I wanted to stop on the
way and see one of my Sunday School children.
Fan bought her braid, and we found the baby at the Day’s was
sick, and Betty had to stay at home to help take care of it. Poor thing,
how wild and wan it looked, so different from our rosy Edith.
Mrs. Day’s house was generally in disorder. She was a hard-
working woman in some respects, for she was always at it. Her
husband was a gardener and day-laborer, earning his twelve dollars
a week pretty regularly, and they owned a small cottage and garden,
that Mrs. Day senior had left them. Yet they always looked very poor.
“Yes,” Mrs. Day was saying, “I couldn’t spare Betty on Sunday.
Husband went over the river to see his cousin, and took little Jem. I’d
been hard at work all the week, and was clear beat out, up half the
night, too. And I don’t see as the baby gets a bit better. You don’t
know what it is to look after a baby all alone by yourself, and not
have a soul to raise a finger for you.”
“But Betty helps a good deal.” I returned, for I could not bear to
have the child so underrated.
“A girl like that can’t do much at the best. Now, if I had one or two
grown up, as your mother has!”
She always thought if she only had something another person
possessed, she should be happier. I wondered a little how she would
get along with mamma’s cares and worries, and sewing, to say
nothing of the demands from outside.
“Ask your ma if she cannot come over. Hardly a soul has been in,
and I can’t go anywhere for a bit of change. But poor people have to
do the best they can in trouble.”
I promised, and spoke a few words of cheer to sad-eyed Betty.
“That woman always does try me!” declared Fan. “If I was a
minister’s wife she would be a thorn in my side. How many poor,
inefficient people there are in this world, and the worst feature
appears to be their inability to learn anything! I do not believe they try
in good earnest.”
“Yet I feel sorry for her.”
“Well, yes, and the poor sick baby. But if her room had been
swept, her dishes taken to the kitchen, and her hair combed, and a
collar on, how it would have altered the aspect of the place! And she
seems to think every one else in the world has it so much easier.”
“This is one of the places where one must not weary in well-doing,
papa would say,” was my rejoinder.
“You are a good little girl, Rose. I have not half your faith or
patience. I wonder if I shall be of any real and sensible use in this
world?”
“You can try to-morrow. The house will be clean.”
“I am afraid I should not want to go, otherwise,” she returned,
laughingly.
The man came over for her the next morning, quite early, having
been to the village on business. We felt that she was going off in
state, but I suppose it was on account of its being the West Side and
the Churchills, for Fan somehow was fortunate in having plenty of
rides fall to her share. She uttered a laughing good-bye and they
drove away.
It seems odd how one event comes out of another, like the
wonderful Chinese transformations. You open a ball and the article
inside is one you would never have guessed at. You go to some
place, and one trifling incident changes the course of one’s whole
life, or a few words that some person utters carelessly brings about a
new train of thought and action, and your life is not quite the same
afterward.
The Churchill mansion had a look of the old nobility. It was two
stories, with a great, double pitched roof, and wide, overhanging
eaves. Just the old fashion of white and green. But the blinds were
never faded, and the exterior never soiled. A porch on the front and
one side, upheld by square, white columns, and on the other side the
graveled roadway to the barn. A lawn in front, terraced twice, with
clumps of blossoming shrubs, or dainty beds cut out sharply in the
grass. For the house stood on a slight hill which gave it a still more
commanding appearance.
But around, just a trifle removed, to let in the sunshine, stood the
glory of it all. Great trees, elms, maples, a giant black-walnut,
hemlocks that must have grown nearly a hundred years, firs, spruce
and larches waving their long fringy arms. No modern sacrilegious
hands had come near to disturb them. Birds built in their branches
year after year, and the sunshine sifted through on the grass.
It was a warm morning and Miss Lucy’s reclining chair had been
wheeled out to the shady side of the porch. She was dressed in
white with pale pink roses in her hair and at her throat. Just turned of
thirty she had the Churchill maturity with a certain delicate
girlishness. You could imagine Miss Esther being a handsome and
stately old woman, but it seemed as if Miss Lucy must always stay
where she was.
Mr. Churchill came to help her out, Miss Esther welcomed her
warmly, and Lucy put forth her hand with a smile.
“I was afraid we might be too early, but Abner had to go over on
business, and we told him to wait if you were not ready. Did you
have a pleasant ride?”
“It is very kind of you to come. I hope I shall not tire you out before
the day is over,” said Miss Lucy.
“O, you will not, I am sure,” Fanny returned with her bright smile. “I
am delighted to come.”
“And the sewing?” Miss Churchill exclaimed.
“I did all the long seams last evening, and Rose is to bind my
trimming for me, but I am much obliged.”
“What industrious girls you are. I am almost conscience smitten.
Are you quite sure you could be spared?”
“Yes, indeed. Don’t think of that please, Miss Churchill.”
“Will you sit here awhile? The air is so fresh and fragrant. The
greater part of my going out amounts to this only, so I am thankful for
the beautiful prospect. Look at those woods over there.”
Another knoll dark with evergreens as tall as those around the
house. At a little distance an adjoining hill, but in the level opening
between, there was a field of ripening wheat which looked like a
golden sea. Fan spoke of it.
“How odd,” returned Miss Lucy, “I have had the same thought
dozens of times in the last fortnight. I sometimes imagine that there
is a lovely undiscovered country just beyond, and what it is like. I am
glad that I cannot go out to discover it, that would take away half the
charm.”
Fanny smiled at the quaint conceit, so satisfying.
“And now tell me all about the children at home, and the sick
young man? What do you think Dr. Hawley said to me a few days
ago?—Miss Lucy, you need some one to bring you a good dish of
gossip.”
“Good gossip at that;” laughed Mr. Churchill with a humorous
twinkle in his eye. “If Miss Endicott does not acquit herself well, I’ll go
for some of the village cronies.”
“I’ll begin with the baby then,” and Fanny moved her seat a trifle.
“She is just the cunningest baby you ever saw. We were all smart
children, but she is a prodigy. She sits alone, and creeps a little
sideways, and when she gets in a glee, flaps her wings, i. e. her
arms, and crows.”
Mr. Churchill shook his head solemnly. “That will hardly do for a
girl,” he said, “and a clergyman’s daughter.”
“We think it best for her to do her crowing while she is small,” was
Fannie’s playful answer.
She talked about the others—Fan had a way of brightening up
everything that was very amusing. Not that she ever made it out
better or worse—it was only the quaint touches of harmless
pleasantry.
Miss Lucy laughed softly and a pink tint came to her pale cheeks.
Miss Esther in the meanwhile made several journeys to and fro.
Mr. Churchill took up his paper and pretended to read, but his eyes
wandered to the fair young girl whose simple homelikeness was her
greatest charm. Presently the sun came around, and Miss Lucy’s
chair was wheeled to the sitting room, which was cool and shady.
All their entertainments were not kept for the great drawing-room.
Here were pictures, a well filled book-case, articles of virtu, a cabinet
of shells, minerals and precious stones, and portfolios of fine
engravings. Here an album filled with notable authors, artists and
musical people, another with eminent men of Europe, and
remarkable women. Fan had enough to entertain her there.
Suddenly a bell rang.
“This is the shortest morning that I have known for some time,”
exclaimed Miss Lucy. “It hardly seems possible that is the dinner
bell. We are old fashioned in our hour, you see.”
Fan was astonished as well. Mr. Churchill gave Lucy his arm, as
she could walk with a little assistance. Miss Esther led Fanny.
The dinner table was like a picture. The quaint old china, delicately
flowered, and the antique silver was set off by the snowy cloth and
the brilliant bouquets with trailing stems that looked as if they might
have grown in the vases. Fan enjoyed it all to the uttermost, and was
too happy to envy aught of it.
“You have been sitting up all the morning;” said Miss Churchill,
“and you do not look a bit tired now! Shall we give Miss Fanny the
credit?”
“I think she deserves it. Indeed I hardly noticed how the time
passed. You see I get so tired of staying alone, or talking over the
same old subjects with Essie.”
“You are a grateful young woman I must say!” and Miss Churchill
laughed.
“Kenton, couldn’t we have a drive to Round Hill about sunset? I
think I could go.”
“What, more dissipation?”
“Please don’t undertake too much,” said Fanny. “I am well content
to stay here.”
“But the sunset is so lovely there.”
“You must have a good long rest;” said her sister, “and we will see
how you feel then.”
“I dare say Miss Endicott will be glad for I have kept her talking
steadily.”
“I am used to it,” laughed Fan, “and somehow I never understood
the charms of solitude, or perhaps was born incapable of
appreciating them.”
“There is no doubt of that;” Mr. Churchill returned with a quiet
smile.
They sat over their dessert a long while, talking of various subjects
that were exceedingly entertaining. The quiet and air of formal
courtesy that was far removed from stiffness, pleased and interested
Fanny greatly.
But Miss Churchill was inexorable afterward, and would not even
consent to Fan’s going up stairs with Lucy. Instead she took charge
of her and they inspected the house and the clean, fragrant dairy,
and lastly found themselves in Miss Churchill’s room. This was large
and airy, looking cool in its summer dress of matting and furniture of
cane or delicate chintz covers.
The visit was so different from the formal little calls that we had
been in the habit of making with either of our parents. Indeed, Fan
always declared that this day’s experience took her right into the
Churchills’ lives, and I think it did.
A dress of fine white India muslin lay on Miss Churchill’s bed. At
least, the skirt which had three ruffles edged with delicate
needlework. The rest had been ripped apart and ironed out.
“Do you think it pretty?” asked Miss Churchill.
“It is lovely. What exquisite muslin! I wonder what makes these old
things so much more beautiful than what we have now?”
“They are neater and not so showy.”
“But this would be noticeable anywhere.”
“Yes, yet it has an air of quiet refinement. Twenty or thirty years
ago ladies bought dresses to keep, now they are unpardonably old
after one or two seasons, therefore it does not pay to make them so
elegant. My dear Miss Fanny, I may as well confess to a conspiracy.
I brought out a lot of old dresses yesterday—too pretty to give to the
absolute poor. I selected this and altered the skirt. It is all done but
the band. I did not know precisely what to do with the waist, so I shall
have to give you the material. And if you will accept these for
yourself and your sister—there is a great quantity in them, and you
will find it a nice, serviceable fabric, as it will save washing. Please
do not consider me officious.”
“Oh, Miss Churchill!” was all that Fan could say.
“This pine-apple will be good for afternoon wear, and I believe to
some extent in useful gifts. The other I wanted you to have because
it was so pretty. I have two more, which will last me my life time.”
“You are too generous! Oh, Miss Churchill, how can I thank you?”
“By wearing and enjoying them, my dear, and not having any fussy
feeling over them. Just as if they had come from an aunt, for
instance. I do not believe your mother will object. She is too truly a
lady to fancy that I desire to place you under any obligation.”
I should have stood silent and abashed. Fan did the best thing of
all, just clasped her arms around Miss Churchill’s neck and kissed
her for thanks.
The stage came lumbering along at that moment. Miss Churchill
glanced out of the window with one arm still around Fanny.
“Of all things! Here is Winthrop Ogden looking too merry for any
misfortune. It is like him to take us so by surprise. My dear, I will run
down a moment.”
CHAPTER VIII.
AN heard the sound of the voices without distinguishing

the words, and turned to an inspection of the dresses.
There was a dainty apron overskirt of the muslin, with
the same lovely ruffling around it, and plenty for the
waist and sleeves. The others were blue and white
striped, one very narrow, the other about an inch wide, with a kind of
embroidered figure in the stripe. The skirts were long and full, and
with one there was a mantle.
Miss Churchill returned presently.
“You have not mutinied in my absence, have you? My dear girl, I
do not want to place you under any obligation, yet I thought these
garments might be of some use to you and your sister. It would not
do to send them to the sewing society to be cut up for the very poor.
Don’t give yourself an anxious thought. Now go in to Lucy who is
waiting for you, and when she is ready you must come down stairs
and see our nephew.”
Miss Lucy was much rested. “I have had three or four naps which
did me a world of good;” she said. “You see I was very tired, and that
made me rest delightfully. All my good things come at once.
Winthrop is here.”
She looked bright and cheerful.
“Can I not do something for you?” asked Fanny. “I might brush
your hair, I often do mamma’s.”
“If it would not trouble you—Essie does it in the morning, and I
generally manage it in the afternoon. But I am afraid—”
“No,” returned Fan cordially, divining the delicate fear. She took up
the brush and soon had it in order.
Usually Miss Lucy walked about without any assistance, but being
somewhat weak now, she had to help herself with a cane which she
always kept in her room. Fan tried to anticipate her wants, and she
was ready so soon that she rang the bell for her brother, who came
to assist her down stairs.
“This is our nephew, Mr. Ogden;” announced Miss Churchill, “Miss
Endicott.”
Fan remembered seeing him at church occasionally. He was about
twenty-two, and had matured considerably in a year. He was
medium height, with a rather handsome, rollicking face. There was a
laugh in his hazel eyes, in his curly chestnut hair, and it seemed to
play hide and seek about his mouth, the upper lip being shaded by a
soft brown moustache.
“Ah, Miss Endicott,—though I ought to know you without a formal
presentation, only I could not save your life I suppose if I were not
introduced. How are you, Aunt Lucy? Why you have roses, actually! I
thought from Aunt Essie’s letter that you must be a pale shadow!”
“The roses are in your honor, and not very durable. I am glad to
see you, but oh how you have—changed!”
“For the better allow me to hope!”
She laughed. “But how did you come to take us so by surprise? I
thought you were at Newport.”
“I was yesterday. But I had to dance so much night before last,
that I was afraid of impairing my constitution. I began to sigh for
simple country life, and came hither, thinking of uncle Kenton’s
horses.”
“They are in a fine condition;” said Mr. Churchill.
“And I can have only a fortnight’s vacation now, so I mean to make
the most of it. The other two weeks will come in September.”
“Your mother and Helen—?”
“Are delightfully well and charmingly entertained—can you ask
more?”
He gave a droll little smile at this.
We heard sometime afterward that Miss Ogden was engaged, and
her lover’s mother being very fond of her, they had gone to Newport
somewhat on her account.
“Come out on the porch. Here is your chair Lucy,” and Mr.
Churchill wheeled it round. “Why you do look quite bright. Miss
Endicott, we must thank you for part of it.”
“I have not done much, I am sure.”
“Oh, Aunt Lucy, have you a protege, or has Miss Endicott kindly
consented to rule you for the nonce? Will my occupation be gone?”
“What nonsense, Winthrop! Miss Endicott came over to spend the
day, taking pity on me. I have been so forlornly lonesome of late.”
“Then I have arrived just in the nick of time, if that word has any
meaning or relation to anything above or under the waters. Let me
feel your pulse. Quite reduced, I must admit. Beef tea and camomile
flowers three times a day. A long walk morning and evening.
Cheerful society—a new bonnet—and—but try that first. My
knowledge is not exhausted.”
“Could you take the ride, think, Lucy?” asked Miss Churchill.
“Kenton we will have the large carriage and all go.”
“What conspiracy have you planned?” inquired Winthrop.
“A harmless drive,” returned Miss Lucy mirthfully. “If it looks
suspicious we will leave you at home in Hugo’s charge.”
Hugo was a handsome English hound, as aristocratic as his
master.
They all asked and answered questions, drawing Fan within their
beautiful circle by the fine tact of thorough breeding. She was so gay
and charming, and withal natural without any aiming at position or
special notice. Indeed she and Mr. Ogden had two or three passages
of sharpness between them that made their elders laugh.
It came supper time so soon, that Miss Lucy declared gaily she
had been defrauded; the day certainly was shorter than usual.
“Yes,” returned Mr. Churchill, “they are. We have passed the
longest days.”
“Have you? Sometimes I feel as if I were just coming to mine,” and
there was a graver look in her face.
“Aunt Lucy low spirited! Why I thought you were a very princess of
philosophy!”
“One’s heart does fail sometimes.”
“But I am to be married you know, and you are to make me long
visits. I’ll save my buttons for you to sew on, you shall embroider my
initials, and mend my gloves. Will not that be happiness enough?”
“What is your wife to do meanwhile?”
He affected to be puzzled. “Why I suppose she will not know how
to do anything. Is not that the accomplishment of the girl of the
period?”
“There may be girls of the semi-colon who do not go quite so far;”
answered Miss Lucy drolly.
Winthrop glanced up at Fan who colored vividly.
“Excuse me, Miss Endicott, I—”
Stephen Duncan.
“Winthrop you are not to tease Miss Endicott, nor to classify her,
either. I take her under my especial protection.”
“I lay down my arms at once, Aunt Lucy. I am your most obedient.”
And so it went on with bits of fun and pleasantness cropping out
now and then. Mr. Churchill unbending, Miss Churchill straying from
the little hedge of formalities, sweet as a wild briar blossom. And
Lucy was nearly as bright as Fan.
The carriage came around soon afterwards. Mr. Ogden insisted
upon driving, so the man was dispensed with. The Churchill estate
was very large, including the mountainous track and a good deal of
woodland. It was not a much frequented drive, although Round Hill
was one of the curiosities of the town. But the Churchills and the
Garthwaites seemed to fence it in with their sense of ownership, and
it was not common property like Longmeadow and the Cascades.
But it was very beautiful in the low lying light. Here was a field in
deep gloom, shadowed by yonder trees, here a strip of waving grain,
then long sweeps of grassy hillsides broken by clumps of young
cedars or hemlocks. An irregular wooded chain—the mountains,
Wachusetts’ people called them, divided us from the quaint little town
lying in the next valley. Here was the delightful opening that
appeared more level by contrast with the tall trees on both sides, and
next, symmetrical Round Hill, in a flood of golden red light, for the
sun was going down between this and the next eminence.
Fan just turned to Miss Lucy and put out her hand. But the
eloquent words and the intense appreciation were in her fluttering
color, her swelling lip and kindling eye, and the simple gesture.
“I knew you would like it;” said Lucy just as quietly.
Miss Churchill looked over at them. Was she thinking of what Mrs.
Endicott had said—how she kept young in her children’s lives? For
Lucy’s face was like a girl’s again.
“I sometimes think there can be nothing in Europe more beautiful,”
Miss Lucy said at length. “It is my Alps. Ah, if one could paint that
glow!”
Winthrop glanced back. “I wish you could have seen some
pictures in the Academy, Aunt Lucy;” and then he went on to
describe them in an eager manner, evincing much genuine love for
beauty, and a kind of fitness, for his tone was low and earnest,
without any assumption of manishness.
Meanwhile as they wound slowly along, the sky changed from the
crimson gold, to orange, then to a yellow tint, sending out long rays
into the frost-white, not unlike an Aurora. All the edges of the hills
were purple and blue, with a peculiar velvety softness, losing
themselves presently in hazy indistinctness.
“Kenton,” Lucy said, “this place ought to be re-christened. Sunset
Hill would be more appropriate. There is no such enchanting sunset
for miles around.”
“But it isn’t always that,” in his dry humorous way. “And it is always
round.”
“Then mine shall be its holiday name, a kind of golden
remembrance.”
“It is beautiful;” Miss Churchill said with deep feeling. “Miss Fanny,
your father preached a good sermon last Sunday morning, about our
longing for loveliness and grandeur which was far away, and not
enjoying that right beside us, and our desiring to do some great
thing, waiting years for the opportunity, when we might have made
our lives rich with the small daily deeds that are at our very finger
ends. And how many of us long for Italy when we have clear skies
and glowing sunsets at home that we know nothing about!”
“Because such lives are crowded full to repletion. I sometimes
wonder if we do not have too much instead of not enough? I find a
large world right around here, because I can’t get out comfortably to
any larger one.”
“And because you see the beauty in every thing,” returned Fanny
softly. “It’s just like daily bread, the now, and here. We need not
starve to-day because of a famine coming a hundred years hence.”
Mr. Churchill raised his grave eyes and smiled, just a little. They
moved on quietly again, the wide glory of the twilight heavens falling
gently over, clasping hands with the indistinct outlines of the beautiful
earth. The creek went rippling and winding around, making a

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interest rates at a point in time. It is often referred to as a yield curve.

profitability during recessions has diverted funds from liquid assets.

Internet Resources and Questions

6-1. Bondage Supply Company

$120,000 Increase in assets

6-2. Axle Supply Co.

$60,000 Increase in assets

6-3. Garza Electronics

6-4. Madonna’s Clothiers

a. Units Units Change in Ending

b. Ending Cost per Financing cost

6-5. Bambino Sporting Goods

a. Units Units Change in Ending

b. Ending Cost per Financing cost

6-6. Front Page Video Games

a. Production and inventory schedule in units

b. Cash Receipts Schedule

July August Sept. October Nov. Dec.

c. Cash Payments Schedule

January February March April May June

11,600 units  $2 $23,200 $23,200 $23,200 $23,200 $23,200 $23,200

July August Sept. October Nov. Dec.

Foundations of Fin. Mgt. 10Ce 6 - 10 Block, Hirt, Danielsen, Short, Perretta

6-7. Seasonal Products Corporation

a. Production and inventory schedule in units

Foundations of Fin. Mgt. 10Ce 6 - 11 Block, Hirt, Danielsen, Short, Perretta

b. Cash Receipts Schedule (take dollar values from problem statement)

July August Sept. October Nov. Dec.

Foundations of Fin. Mgt. 10Ce 6 - 12 Block, Hirt, Danielsen, Short, Perretta

c. Cash Payments Schedule:

January February March April May June

July August Sept. October Nov. Dec.

Foundations of Fin. Mgt. 10Ce 6 - 13 Block, Hirt, Danielsen, Short, Perretta

July August Sept. October Nov. Dec.

Foundations of Fin. Mgt. 10Ce 6 - 14 Block, Hirt, Danielsen, Short, Perretta

Foundations of Fin. Mgt. 10Ce 6 - 15 Block, Hirt, Danielsen, Short, Perretta

6-8. Liz’s Health Food Stores

Long-term debt is not variable in the short term. Therefore Liz's

$9,000.00 X 12% X 6/12 = $540.00

Foundations of Fin. Mgt. 10Ce 6 - 16 Block, Hirt, Danielsen, Short, Perretta

6-9. Liz’s Health Food Stores (Continued)

Divide the total interest payments in part (a) of $328.33 by the

6-10. Gabriel Health Services Ltd.

6-11. Boatler Used Cadillac Co.

Foundations of Fin. Mgt. 10Ce 6 - 17 Block, Hirt, Danielsen, Short, Perretta

6-12. Sauer Food Company

Foundations of Fin. Mgt. 10Ce 6 - 18 Block, Hirt, Danielsen, Short, Perretta

6-13. Sherlock Homes

Long-term financing equals:

Long-term interest expense = 13%  $3,500,000 = $455,000

6-14. Sherlock Homes (Continued)

Long-term interest expense = 8%  $3,500,000 = $280,000

The company has benefited because it is primarily financed by long-term