P16-15. Cost of commercial paper
LG 4; Intermediate
a.
$1,000,000 $978,000
Effective 90-day rate = 2.25%
$978,000
–=
Effective annual rate (1 0.0225)365/90 1 9.44%
b. Effective 90-day rate with transaction costs:
P16-16. Accounts receivable as collateral
LG 5; Intermediate
a. Acceptable accounts receivable
Customer Amount
D $ 8,000
b. Adjustments: 5% returns/allowances, 80% advance percentage.
P16-17. Accounts receivable as collateral
LG 5; Intermediate
a.
Customer Amount
A $20,000
P16-18. Accounts receivable as collateral, cost of borrowing
LG 3, 5; Challenge
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P16-19. Factoring
LG 5; Intermediate
Holder Company
Factored Accounts
May 30
Accounts Amount Date Due
Status on
May 30
Amount
Remitted
Date of
Remittance
A $200,000 5/30 C 5/15 $196,000 5/15
P16-20. Inventory financing
LG 1, 6; Challenge
a. City-Wide Bank: [$75,000 (0.12 12)] (0.0025 $100,000) $1,000
b. City-Wide Bank is the best alternative because it has the lowest cost.
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Chapter 16 Current Liabilities Management 348
P16-21. Ethics problem
LG 2; Intermediate
The sales tax can be calculated based on the sales data, as follows:
An alternative method is to determine the taxable sales based on the sales tax reported.
Case
Case studies are available on www.myfinancelab.com.
Selecting Kanton Company’s Financing Strategy and Unsecured Short-Term
Borrowing Arrangement
This case asks the student to evaluate the permanent and short-term funding requirements of Kanton Company, and
to choose a financing strategy from among three alternatives: aggressive, conservative, and tradeoff. The
company’s funding requirements vary considerably during the year, showing a seasonal pattern and peaking
mid-year. Then the student must calculate the effective annual interest rates for two short-term borrowing
alternatives and make a recommendation.
a. Strategy I—Aggressive
Strategy 2—Conservative
Strategy 3—Tradeoff
1. Calculation of short-term requirements
Month
(1)
Total Funds
Requirements
(2)
Permanent
Requirements
Seasonal
Requirements
January $1,000,000 $3,000,000 $0
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Chapter 16 Current Liabilities Management 349
b. Net working capital current assets current liabilities
c. The three strategies differ in terms of profitability and risk. The aggressive strategy is the most profitableit
d. 1. Effective interest, line of credit:
Chapter 16 Current Liabilities Management 350
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Chapter 16 Current Liabilities Management 351
Resources needed
Total annual outlays CCC
365 days ´
$26,500,000 155
365 ´
$11,253,425
b. Industry OC 83 days 75 days
c. Casa de Diseño
Negotiated financing $11,253,425
d. 1. Offering 3/10 net 60:
Reduction in collection period 75 days (1 0.4)
2. Reduction in sales: $40,000,000 0.45 0.03 $540,000
3. Average investment in accounts receivable assuming cash discount:
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Chapter 16 Current Liabilities Management 352
4. Reduction in bad debt expense:
5. Cost of offering cash discount ($ 540,000)
e. Ms. Leal should bring working capital measures in line with the industry and offer the proposed cash
f. The other sources of financing available include both unsecured and secured sources.
Unsecured Sources:
Secured Sources:
Pledging accounts receivable—a lender loans money on the basis of the creditworthiness of the borrower’s
the money is remitted to the lender.
Factoring accounts receivable—selling the firm’s accounts receivable to a lender at a discount
to the book value of the receivables. The factor normally receives the payment directly from
the customer when they make payment.
Floating inventory liens—when inventory is used as collateral for a loan.
Trust receipt inventory loans—a loan against relatively expensive and easily identifiable assets, such as
automobiles. The loan is repaid when the asset is sold.
Warehouse receipt loans—when assets in a warehouse are pledged against a loan. The lender takes control
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