Chapter 14 CFIN5
Chapter 14 Solutions
14-1 Inventory conversion period = 45 days
DSO = 30 days
DPO = 20 days
a. Cash conversion cycle = 45 days + 30 days – 20 days = 55 days
14-2 Sales = $180,000
Cost of goods sold = 85 percent of sales
Inventory turnover = 8.0
Accounts receivable turnover = 10.0
DPO = 30 days
a. DSO = (360 days)/10 = 36 days
b. Accounts receivable = $180,000/10 = $18,000 = $180,000/(360 days) x 36 days
14-3 Cost of goods sold = $480,000
Cost of goods sold = 80 percent of sales
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accessible website, in whole or in part.
Chapter 14 CFIN5
a. Cash conversion cycle = 24 days + 15 days – 9 days = 30 days
b. Accounts receivable = $600,000/15 = $40,000 = $600,000/(360 days) x 24 days
14-4 September 30, 2017
December 31, 2017
14-5 g = 5%
TA on 1/1 = $420,000,000
TA on 6/30 = $480,000,000
14-6
0.03 360
APR = = (0.030928)(12) = 0.3711 37.11%
0.97 45 15
æ öæ ö =
ç ÷ç ÷
–
è øè ø
rEAR = (1.030928)(360/30) – 1.0 = 0.44125 = 44.13%
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accessible website, in whole or in part.
Chapter 14 CFIN5
14-7 a.
0.02 360
A PR = = (0.020408)(12) = 0.2449 24.49%
0.98 45 15
æ öæ ö =
ç ÷ç ÷
–
è øè ø
b.
0.03 360
APR = = (0.030928)(9) = 0.27835 27.84%
0.97 45 5
æ öæ ö =
ç ÷ç ÷
–
è øè ø
14-8 a. Terms: 3/10, net 50—non-discount customers pay on Day 50
0.03 360
APR = = (0.030928)(9) = 0.2784 27.84%
0.97 50 10
æ öæ ö =
ç ÷ç ÷
–
è øè ø
rEAR = (1.030928)(360/40) – 1.0 = 0.3154 = 31.54%
Terms: 2.5/15, net 45—non-discount customers pay on Day 45
0.025 360
A PR = = (0.025641)(12) = 0.3077 30.77%
0.975 45 15
æ öæ ö =
ç ÷ç ÷
–
è øè ø
rEAR = (1.025641)(360/30) – 1.0 = 0.3550 = 35.50%
b. Terms: 3/10, net 50—non-discount customers pay on Day 60
0.03 360
A PR = = (0.030928)(7.2) = 0.2227 22.27%
0.97 60 10
æ öæ ö =
ç ÷ç ÷
–
è øè ø
rEAR = (1.030928)(360/50) – 1.0 = 0.2452 = 24.52%
Terms: 2.5/15, net 45—non-discount customers pay on Day 55
0.025 360
A PR = = (0.025641)(9) = 0.2308 23.08%
0.975 55 15
æ öæ ö =
ç ÷ç ÷
–
è øè ø
rEAR = (1.025641)(360/40) – 1.0 = 0.2559 = 25.59%
14-9 a. Interest each 30 days = (0.10/12)($150,000) = $1,250
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accessible website, in whole or in part.
Chapter 14 CFIN5
PER
$1,250
r 0.008333
$150,000
= =
APR = 0.008333 x 12 = 0.10 = 10.0%
rEAR = (1.0083333)12 – 1.0 = 0.1047 = 10.47% = [1 + (0.10/12)]12 – 1
b. If a 20 percent compensating balance was required, the compensating balance would be $30,000
= 0.2($150,000). If the company holds no funds at the bank, the $30,000 compensating balance
14-10 Interest each 40 days = [0.12(40/360)]($60,000) = $800
( )
( )
PER
40
$60,000 0.12 $800
360
r 0.0135135
$59,200
40
$60,000 $6,000 0.12 360
é ù
´ ´
ê ú
ë û
= = =
é ù
– ´ ´
ê ú
ë û
APR = 0.0135135 x 9 = 0.1216 = 12.16%
rEAR = (1.0135135)9 – 1.0 = 0.1284 = 12.84%
14-11 a. Interest each 60 days = [0.12(60/360)]($150,000) = $3,000
PER
$3,000
r 0.02
$150,000
= =
APR = 0.02 x 6 = 0.12 = 12.0%
rEAR = (1.02)6 – 1.0 = 0.1262 = 12.62% = [1 + (0.12/6)]6 – 1
b. If a 25 percent compensating balance was required, the compensating balance would be $37,500
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accessible website, in whole or in part.
Chapter 14 CFIN5
APR = 0.02667% x 6 = 0.16 = 16.00%
rEAR = (1.026667)6 – 1.0 = 0.1711 = 17.11%
c. If PAR needs $150,000 to use as it pleases, the company must borrow
$150,000
Pr incipal $200,000
(1 0.25)
= =
–
Check:
If PAR borrows $200,000 and must maintain a 25 percent compensating balance at the bank, if
will be able to use:
Amount borrowed $200,000
Compensating balance ( 50 ,000) = 200,000(0.25)
Usable funds from loan $150,000
14-12 a. Interest each 45 days = [0.08(45/360)]($1,500,000) = $15,000
PER
$17,000
r 0.01
$1,700,000
= =
APR = 0.01 x (360/45) = 0.08 = 8.0%
rEAR = (1.01)(360/45) – 1.0 = 0.0829 = 8.29% = [1 + (0.08/8)]8 – 1
b. If a 15 percent compensating balance was required, the compensating balance would be
$255,000 = 0.15($1,700,000). If the company holds no funds at the bank, the $255,000
compensating balance would have to be taken out of the loan proceeds, which means that only
c. If MAP needs $1,700,000 to use as it pleases, the company must borrow
$1,700,000
Pr incipal $2,000,000
(1 0.15)
= =
–
Check:
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accessible website, in whole or in part.
Chapter 14 CFIN5
14-13 a. Interest each 30 days = [0.09(30/360)]($450,000) = $3,375
( )
( )
PER
30
$450,000 0.09 $3,375
360
r 0.007557
$446,625
30
$450,000 $450,000 0.09 360
é ù
´ ´
ê ú
ë û
= = =
é ù
– ´ ´
ê ú
ë û
APR = 0.007557 x 12 = 0.0907 = 9.07%
rEAR = (1.007557)12 – 1.0 = 0.09455 = 9.46%
b. If Albatross needs $450,000 to use as it pleases, the company must borrow
$1,450,000
Pr incipal $453,400.50
(1 0.09/12)
= =
–
Check:
If Albatross borrows $453,400.50 using a discount interest loan, if will be able to use:
The APR and EAR on this loan will be the same as computed in part (a):
14-14 a. Interest = $25,000(0.11) = $2,750
b. APR = $2,750/$25,000 x 360/360 = 0.11 = 11.0%
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accessible website, in whole or in part.
Chapter 14 CFIN5
14-15 Interest = $100,000(0.07)(180/360) = $3,500
14-16 Interest = $100,000(0.05)(90/360) = $1,250
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accessible website, in whole or in part.
Chapter 14 CFIN5
14-17 Cost of trade credit:
0.025 360
APR = = (0.025641)(5.14286) = 0.13187 13.19%
0.975 90 20
æ öæ ö =
ç ÷ç ÷
–
è øè ø
rEAR = (1.025641)(360/70) – 1.0 = 0.13906 = 13.91%
Cost of the bank loan:
( )
( )
PER
360
$50,000 0.12 $6,000
360
r 0.16438
$36,500
360
$50,000 $50,000 0.12 $50,000(0.15)
360
é ù
´ ´
ê ú
ë û
= = =
é ù
– ´ ´ –
ê ú
ë û
rEAR = (1.16438)(360/360) – 1.0 = 0.16438 = 16.44%
Clicker should forgo the cash discount—that is, pay its supplier on Day 90—because it is cheaper than
taking the bank loan.
14-18 Cost of loan (a):
Cost of loan (b):
( )
( )
PER
360
0.10 0.10
360
r 0.1333 13.33%
0.75
360
1 0.10 (0.15)
360
é ù
´
ê ú
ë û
= = = =
é ù
– ´ –
ê ú
ë û
rEAR = (1.1333)(360/360) – 1.0 = 0.1333 = 13.33%
Loan (a) has the lower effective cost.
14-19 Loan (a):
Because this is a simple interest loan that has no compensating balance and a maturity of one year, the
PDQ can borrow $90,000. No adjustments are made to the principal amount.
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accessible website, in whole or in part.
Chapter 14 CFIN5
$90,000 $90,000
Pr incipal amount = $120,000
1 0.15 0.10 0.75
= =
– –
é ù
ë û
Check: If PDQ borrows $120,000 with a discount loan and the compensating balance is 15
percent, the amount of the loan that the company can use is:
Usable funds = $120,000 – $120,000(0.15) – $120,000[0.10/(360/360)]
= $120,000 – $18,000 – $12,000 = $90,000
14-20 a. Option 1: Because BoGo tries to maintain a checking balance equal to $10,000, some of the
funds from the loan must be used to satisfy the compensating balance requirement. Thus,
Chapter 14 CFIN5
b. Cost of Option 1:
( )
( )
PER
180
$250,000 0.08 $10,000
360
r 0.05
$200,000
180
$250,000 $250,000 0.08 [$250,000(0.20) $10,000]
360
é ù
´
ê ú
ë û
= = =
é ù
– ´ – +
ê ú
ë û
rEAR = (1.05)(180/360) – 1.0 = 0.1025 = 10.25%
Cost of Option 2:
( )
( )
PER
180
$210,084 0.09 $210,084(0.003) $10,084
360
r 0.05042
$200,000
180
$210,084 $210,084 0.09 $210,084(0.003)
360
é ù
´ +
ê ú
ë û
= = =
é ù
– ´ –
ê ú
ë û
rEAR = (1.05042)(180/360) – 1.0 = 0.1034 = 10.34%
Option 1 has the lower effective cost.
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accessible website, in whole or in part.