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A B C D E F G
Solution
Chapter: 27
Problem: 11
a. How large would the accounts payable balance be if Stewart takes discounts? If it does
Stewart Manufacturing buys on terms of 2/10, net 30, but it has not been paying on time--it is
Stewart's suppliers are fed up and will not continue selling to Stewart unless Stewart begins making
(that is, paying in 30 days or less). The firm is going to have to reduce its level of accounts pay
should it obtain from its bank?
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A B C D E F G
Cash needed to reduce current accounts payble to the level based on taking discounts:
Cash needed to reduce current accounts payble to the level based on not taking discounts:
Amount needed = Loan - (Interest rate on loan)(Loan) - (Compensating balance)(
Loan = Amount needed/(1- Interest rate - Comp. Balance %)
Loan amount needed if take discounts on credit purchases: ########
Loan amount needed if not take discounts on credit purchases: ########
(1) Cost of nonfree trade credit
Recall that because of the discount interest and compensating balance, the firm does not ac
amount of the loan. Therefore, it must borrow more (face value of the note) than it actually needs. T
finding the necessary loan to sustain a $250,000 cash receipt is:
c. What are the nominal and effective costs of nonfree trade credit? What is the effective
cost of the bank loan? Based on these costs, what should Stewart do?
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A B C D E F G
(2) Cost of the bank loan
0 (1 Year) 1
Using the RATE function, we can determine the cost of the bank loan.
Cost of bank loan = 23.19%
Interest
Rate
Required Loan
Compensating Balance Percentage
Terms of the bank loan are a 16% discount interest rate, and a 15% compensating balance.
rate on the loan) are the same regardless of how much the firm borrows. Assume an amou
needed if Stewart does not take discounts on its purchases. We will set up a one-year timeline t
relevant to this situation.
This cost rate would be the same for the larger loan. Since the cost of the bank loan exceeds t
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A B C D E F G
######## 0% 10% 20% 30%
5% 1,052,632$ 1,176,471$ ######## 1,538,462$
10% 1,111,111$ 1,250,000$ ######## 1,666,667$
15% 1,176,471$ 1,333,333$ ######## 1,818,182$
20% 1,250,000$ 1,428,571$ ######## 2,000,000$
$ 200
$ 250
$ 300
$ 350
$ 400
$ 450
$ 500
5% 10% 15% 20%
Size of Loan
Interests rate
Loan Sensitivity
Comp Bal = 0%
Comp Bal = 10
Comp Bal = 20
Comp Bal = 30
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H I J K L M N O
7/16/2015
250,000
250,000
3,000,000
750,000
6,250,000
##########
ment 50
16%
it is a "slower payer," and its
an additional 1-year note payable
compensating balance required.
part of the compensating
use, and how large a loan
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H I J K L M N O
2,000,000$
1,000,000$
g balance)(Loan)
period - this period)
t actually receive the full face
ally needs. The formula for
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H I J K L M N O
balance. This terms (and the effective
me an amount equal to the amount
imeline to analyze the cash flow
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H I J K L M N O
al = 0%
al = 10%
al = 20%
al = 30%
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P Q R S T U V W X Y
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P Q R S T U V W X Y
