Chapter 06: Working Capital and the Financing Decision
with short-term financing. The same interest rates apply as in part a. Earnings before
interest and taxes will be $240,000. What will be Lear’s earnings after taxes? The tax
rate is 30 percent.
c. What are some of the risks and cost considerations associated with each of these
alternative financing strategies?
Chapter 06: Working Capital and the Financing Decision
b. If long-term financing at 12 percent had been utilized throughout the six months, would
the total-dollar interest payments be larger or smaller? Compute the interest owed over
the six months and compare your answer to that in part a.
6-18. Solution:
Carmen’s Beauty Salon
a. Short-term financing
Month
Rate
On Monthly
Basis
Amount
Actual
Interest
January
9%
0.75%
$8,500
$ 63.75
February
10%
0.83%
$2,500
$ 20.75
March
13%
1.08%
$3,500
$ 37.80
April
16%
1.33%
$8,500
$113.05
May
12%
1.00%
$9,500
$ 95.00
June
12%
1.00%
$4,500
$ 45.00
$375.35
6-18. (Continued)
b. Long-term financing
Month
Rate
On Monthly
Basis
Amount
Actual
Interest
January
12%
1%
$8,500
$ 85.00
February
12%
1%
$2,500
$ 25.00
March
12%
1%
$3,500
$ 35.00
April
12%
1%
$8,500
$ 85.00
Chapter 06: Working Capital and the Financing Decision
May
12%
1%
$9,500
$ 95.00
June
12%
1%
$4,500
$ 45.00
$370.00
Total dollar interest payments would be larger under the
short-term financing plan as described in part b.
19. Break-even point in interest rates (LO3) In Problem 18, what long-term interest rate
would represent a break-even point between using short-term financing as described in part
a and long-term financing? (Hint: Divide the interest payments in 18a by the amount of
total funds provided for the six months and multiply by 12.)
6-19. Solution:
Carmen’s Beauty Salon (Continued)
20. Cash receipts schedule (LO1) Eastern Auto Parts Inc. has 15 percent of its sales paid for
in cash and 85 percent on credit. All credit accounts are collected in the following month.
Assume the following sales:
January $65,000
February 55,000
March 100,000
April 45,000
Sales in December of the prior year were $75,000.
Prepare a cash receipts schedule for January through April.
