Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
92.
Your bank offers you a $40,000 line of credit with an interest rate of 1.75 percent per
quarter. The loan agreement also requires that 2 percent of the unused portion of the
credit line be deposited in a non-interest bearing account as a compensating balance.
Your short-term investments are paying 0.20 percent per month. What is your effective
annual interest rate on this arrangement if you do not borrow any money on this credit line
during the year? Assume any funds borrowed or invested use compound interest.
93.
New Town Bank offers you a $40,000 line of credit with an interest rate of 1.6 percent per
quarter. The loan agreement also requires that 3 percent of the unused portion of the
credit line be deposited in a non-interest bearing account as a compensating balance.
Short-term investments are currently paying 1.1 percent per quarter. What is the effective
annual interest rate on the line of credit if you borrow the entire $40,000 for one year?
Assume any funds borrowed or invested use compound interest.
94.
Josie's Craft Shack has a beginning cash balance for the quarter of $1,126. The store has a
policy of maintaining a minimum cash balance of $1,000 and is willing to borrow funds as
needed to maintain that balance. Currently, the firm has a loan balance of $480. How
much will the store borrow or repay if the net cash flow for the quarter is -$280?
95.
The Cement Works has a beginning cash balance for the quarter of $784. Susie, the firm's
president, requires that a minimum cash balance of $900 be maintained and requires that
borrowing be used to maintain that balance. If funds have been borrowed, then she
requires that those loans be repaid as soon as excess funds are available. Currently, the
firm has a loan outstanding of $1,260. How much will the firm borrow or repay this quarter
if the quarterly receipts are $3,918 and the quarterly disbursements are $3,774?
96.
At the beginning of the year, you have an outstanding short-term loan of $274 which was
used to cover your cash needs for the previous year. The interest expense for the year is
$19. The projected net cash flow for this year is $123, prior to any payment of principal or
interest on this loan. What is your anticipated loan balance at year end?
97.
Details Corp. has a book net worth of $8,150. Long-term debt is $1,800. Net working
capital, other than cash, is $2,150. Fixed assets are $2,000. How much cash does the
company have?
98.
The Wake-Up Coffee Company has projected the following quarterly sales amounts for the
coming year:
Accounts receivable at the beginning of the year are $200. Wake-Up has a 60-day
collection period. What is the amount of the accounts receivable balance at the end of
Quarter 3?
99.
Consider the following financial statement information for the Bulldog Icers Corporation:
How long is the cash cycle?
100.
Your firm has an average collection period of 42 days. Current practice is to factor all
receivables immediately at a 4 percent discount. Assume that default is extremely unlikely.
What is the effective cost of borrowing?
101.
Workout Together has projected the following sales for the coming year:
Sales in the year following this one are projected to be 18 percent greater in each quarter.
Assume the firm places orders during each quarter equal to 35 percent of projected sales
for the next quarter. How much will the firm pay to its suppliers in Quarter 2 if its accounts
payable period is 60 days?
102.
The Thunder Dan's Corporation's purchases from suppliers in a quarter are equal to 65
percent of the next quarter's forecasted sales. The payables period is 60 days. Wages,
taxes, and other expenses are 16 percent of sales, and interest and dividends are $60 per
quarter. No capital expenditures are planned. Sales for the first quarter of the following
year are projected at $720. The projected quarterly sales are:
What is the amount of the total disbursements for Quarter 2?
103.
The following is the sales budget for Duck-n-Run, Inc., for the first quarter of 2012:
The accounts receivable balance at the end of the previous quarter was $45,000 ($32,000
of which was uncollected December sales.) What is the amount of the January
collections?
104.
Here are some important figures from the budget of Nashville Nougats, Inc., for the
second quarter of 2012:
The company predicts that 3 percent of its credit sales will never be collected, 36 percent
of its sales will be collected in the month of sale, and the remaining 61 percent will be
collected in the following month. Credit purchases will be paid in the month following the
purchase.
In March 2012, credit sales were $302,400, and credit purchases were $224,640. The April
1 cash balance was $403,200. What is the cash balance at the end of May?
105.
You've worked out a line of credit arrangement that allows you to borrow up to $50 million
at any time. The interest rate is 0.5 percent per month. In addition, 7 percent of the
amount that you borrow must be deposited in a non-interest bearing account. Assume
your bank uses compound interest on its line of credit loans. What is the effective annual
interest rate on this lending arrangement?
106.
A bank offers your firm a revolving credit arrangement for up to $115 million at an interest
rate of 2 percent per quarter. The bank also requires you to maintain a compensating
balance of 5 percent against the
unused
portion of the credit line, to be deposited in a
non-interest-bearing account. Assume you have a short-term investment account at the
bank that pays 1.3 percent per quarter, and assume the bank uses compound interest on
its revolving credit loans. What is the effective annual interest rate on the revolving credit
arrangement if your firm does not borrow any money during the year?
Essay Questions
107.
List and describe the three basic types of secured inventory loans. Compare the
advantages and disadvantages of these loans.
108.
Using two separate graphs, illustrate a flexible and a restrictive short-term financing
policy. Place costs on the vertical axis and current assets on the horizontal axis. On each
graph, indicate the shortage costs, carrying costs, total costs, and indicate the optimal
investment in current assets.
109.
Assume that long-term interest rates are substantially higher than short-term interest
rates and are expected to remain that way for the foreseeable future. How does this affect
a firm's selection of a financing policy for its current assets?
110.
Compensating balances are frequently a part of revolving lending arrangements with
banks, yet they add to the cost of financing for the borrower. Why, then, would borrowers
agree to such terms? What other types of alternative financing are available?
