Short-Term Financing

Transcription

1 Short-Term Financing 1. Bridgeport Inc has a $30 million revolving credit agreement with its bank at prime plus 3.2% based on a calendar year. Prior to the month of April, it had taken down $15 million that was outstanding for the entire month. On April 10, it took down another $5 million. Prime is 8.2%, and the bank's commitment fee is 0.25% annually. Calculate the total charges associated with Bridgeport's revolving credit agreement for the month of April. a. $174,167 b. $2,427 c. $176,594 d. $171, Southport Inc. has an inventory turnover of 10x, a DSO of 45 days, and turns over its payables once a month. How long is Southport's cash conversion cycle? (Use a 360-day year.) a. 36 days; 45 days b. 81 days; 45 days c. 81 days; 51 days d. 51 days; 36 days 3. Dexter Instrument Company's sales average $3 million per day. If Dexter could reduce the time between customers' mailing their payments and the funds' becoming collected balances by 2.5 days, what would be the increase in the firm's average cash balance? a. $3.5M b. $5.5M c. $6M d. $7.5M 4. Dexter Instrument Company's sales average $3 million per day. Dexter could reduce the time between customers' mailing their payments and the funds' becoming collected balances by 2.5 days to increase in the firm's average cash balance. Assuming that these additional funds can be invested in marketable securities to yield 8.5 percent per year, determine the annual increase in Dexter's (pretax) earnings. a. $750,000 b. $637,500 c. $250,000 d. $857,500

2 5. Miranda Tool Company sells to retail hardware stores on credit terms of "net 30." Annual credit sales are $18 million and are spread evenly throughout the year. The company's variable cost ratio is 0.70, and its accounts receivable average $1.9 million. Using this information, determine the average daily credit sales (assume there are 365 days per year). a. $49,315 b. $5,205 c. $570,000 d. $46, Miranda Tool Company sells to retail hardware stores on credit terms of "net 30." Annual credit sales are $18 million and are spread evenly throughout the year. The company's variable cost ratio is 0.70, and its accounts receivable average $1.9 million. Assume there are 365 days per year. Using this information, what is the days sales outstanding? a b c. 39 d The Milton Company currently purchases an average of $22,000 per day in raw materials on credit terms of "net 30." The company expects sales to increase substantially next year and anticipates that its raw material purchases will increase to an average of $25,000 per day. Milton feels that it may need to finance part of this sales expansion by stretching accounts payable. Assuming that Milton currently waits until the end of the credit period to pay its raw material suppliers, what is its current level of trade credit? (Assume a 365-day year when converting from annual to daily amounts or vice versa.) a. $750,000 b. $660,000 c. $90,000 d. $364,999

3 8. The Milton Company purchases an average of $22,000 per day in raw materials on credit terms of "net 30," and expects sales to increase substantially next year, increasing its raw material purchases to an average of $25,000 per day. Milton feels that it may need to finance part of this sales expansion by stretching accounts payable. Assume that Milton currently waits until the end of the credit period to pay its raw material suppliers, and find its current level of trade credit. (Assume a 365-day year when converting from annual to daily amounts or vice versa.) Now, if Milton stretches its accounts payable an extra 10 days beyond the due date next year, how much additional shortterm funds (that is, trade credit) will be generated? a. $340,000 b. $220,000 c. $250,000 d. $660, The Pulaski Company has a line of credit with a bank under which it can borrow funds at an 8% interest rate. The company plans to borrow $100,000 and is required by the bank to maintain a 15% compensating balance. What is the annual financing cost of the loan if the company currently maintains $7,000 in its bank account that can be used to meet the compensating balance requirement. (Assume a 365-day borrowing period.) a. 7.6% b. 8.0% c. 8.7% d. 9.2% 10. The Pulaski Company has a line of credit with a bank under which it can borrow funds at an 8% interest rate. The company plans to borrow $100,000 and is required by the bank to maintain a 15% compensating balance. Determine the annual financing cost of the loan if the company currently has no funds in its account at the bank that can be used to meet the compensating balance requirement. (Assume a 365-day borrowing period.) a. 9.41% b. 8.50% c. 17.6% d. 7.41% 11. Perry Chemicals is in the process of constructing a financial plan for the coming year. It has estimated that fixed assets will be equal to 200,000,000 for the year and that current asset requirements vary between a minimum of 50,000,000 and a maximum of 80,000,000 during the year. What is the amount of permanent assets? a. 30,000,000 b. 130,000,000 c. 150,000,000 d. 250,000,000

4 12. Perry Chemicals is in the process of constructing a financial plan for the coming year. It has estimated that fixed assets will be equal to 200,000,000 for the year and that current asset requirements vary between a minimum of 50,000,000 and a maximum of 80,000,000 during the year. What is the amount of maximum temporary assets? a. 30,000,000 b. 130,000,000 c. 150,000,000 d. 250,000, What is the nominal annual cost of trade credit given payment terms offering a 3% discount if payment is received 15 days after purchase or payment in full is due in 45 days (Assume 360 days per year)? a. 36% b % c % d. 30% 14. Rhine River Products is considering changing to a cash management system that would reduce its mail delay from 3 days to 1 day and totally eliminate its processing delay of 2 days. On average, the firm collects DM75,000 of credit sales per day. The firm's marginal tax rate is 46%, and its required rate of return on the system is 15%. What amount of funds would be made available if Rhine River switched to the proposed system? a. DM300,000 b. DM18,750 c. DM11,250 d. DM345, Rhine River Products is considering changing to a cash management system that would reduce its mail delay from 3 days to 1 day and totally eliminate its processing delay of 2 days. On average, the firm collects DM75,000 of credit sales per day. The firm's marginal tax rate is 46%, and its required rate of return on the system is 15%. What compensating balance requirement would the firm be willing to accept if the system is implemented? a. DM300,000 b. DM18,750 c. DM11,250 d. DM345,000

5 16. Pentec Electric is in the process of forecasting accounts receivable. However, the company is unsure of the amount of credit sales and whether the days sales outstanding will be 30 or 40 days. If annual credit sales are $45 million, what is the balance in accounts receivable for a DSO of 30 and a DSO of 40 (Assume 360 days per year)? a. $3,750,000; $5,000,000 b. $5,000,000; $1,500,000 c. $1,500,000; $1,125,000 d. $5,125,000; $3,750, Pentec Electric is in the process of forecasting accounts receivable. However, the company is unsure of the amount of credit sales and whether the days sales outstanding will be 30 or 40 days. If annual credit sales are $60 million, find the balance in accounts receivable for a DSO of 30 and a DSO of 40. a. $3,750,000; $5,000,000 b. $5,000,000; $6,500,000 c. $5,000,000; $6,666,667 d. $5,125,000; $6,666, In order to attract new customers, Media Technique is considering changing its credit terms from net 30 to net 60. Currently, Media's days sales outstanding is 40 days and is expected to increase to 70 days if the terms are extended to net 60. The liberal credit period is expected to add FF30,000,000 in new annual sales to the current sales level of FF150,000,000. What is Media's current balance in accounts receivable (Assume 360 days per year)? a. FF120,000,000 b. FF375,000 c. FF16,666,667 d. FF41,666,667

6 19. In order to attract new customers, Media Technique is considering changing its credit terms from net 30 to net 60. Currently, Media's days sales outstanding is 40 days and is expected to increase to 70 days if the terms are extended to net 60. The liberal credit period is expected to add FF30,000,000 in new annual sales to the current sales level of FF150,000,000. What will Media's balance in accounts receivable be if the longer credit period is made effective (Assume 360 days per year)? a. FF35,000,000 b. FF29,166,667 c. FF5,833,333 d. FF10,500,000

7 THE PROBLEM BANK - SOLUTIONS Part 6 - Short-Term Financing Section 1 - Basic 1. Bridgeport Inc has a $30 million revolving credit agreement with its bank at prime plus 3.2% based on a calendar year. Prior to the month of April, it had taken down $15 million that was outstanding for the entire month. On April 10, it took down another $5 million. Prime is 8.2%, and the bank's commitment fee is 0.25% annually. Calculate the total charges associated with Bridgeport's revolving credit agreement for the month of April. a. $174,167 b. $2,427 c. $176,594 d. $171,740 ANSWER: c k = 8.2% + 3.2% = 11.4% =>.95% monthly Annual commitment fee =.25% =>.0208% monthly Outstanding in April: $15M for the whole month $5M for 2/3 month Unused balance: $30M - $15M = $15M for 1/3 month $30M - $15M - $5M = $10M for 2/3 month Interest: [$15M + (2/3)$5M](.0095) = $174,167 Commitment fee: [(1/3)$15M + (2/3)$10M]( ) = $2,427 Total Cost: $2,427 + $174,167 = $176,594 KEYSTROKES: HP Cost of debt (Kd): 8.2 [+] 3.2 [=] Solution: 11.40% (yearly) [ ] 12 [=] Solution:.95 (monthly) TI Cost of debt (Kd): 8.2 [+] 3.2 [=] Solution: 11.40% (yearly) [ ] 12 [=] Solution:.95 (monthly) Commitment fee:.25% (yearly) [ ] 12 [=] Solution:.0208% (monthly) Commitment fee:.25% (yearly) [ ] 12 [=] Solution:.0208% (monthly) Interest Cost: 2 [ ] 3 [x] 5,000,000 [+] 15,000,000 [x].0095 [=] Interest Cost: 2 [ ] 3 [x] 5,000,000 [+] 15,000,000 [x].0095 [=]

8 Solution: 174, Solution: 174, Commitment fee cost: 2 [ ] 3 [x] 10,000,000 [+] [ '] [ ( ] [ '] [ ( ] 1 [ ] 3 [ '] [ ) ] [x] 15,000,000 [ '] [ ) ] [x] [=] Solution: 2, [+] 174, [=] Commitment fee cost: 2 [ ] 3 [x] 10,000,000 [+] [ ( ] [ ( ] 1 [ ] 3 [ ) ] [x] 15,000,000 [ ) ] [x] [=] Solution: 2, [+] 174, [=] Solution: 176, Solution: 176, Southport Inc. has an inventory turnover of 10x, a DSO of 45 days, and turns over its payables once a month. How long is Southport's cash conversion cycle? (Use a 360-day year.) a. 36 days; 45 days b. 81 days; 45 days c. 81 days; 51 days d. 51 days; 36 days ANSWER: c Inventory Conversion Period = 360/10 = 36 days Cash conversion Cycle = Inventory Conversion Period + DSO - Payables Deferral Period = = 51 days 3. Dexter Instrument Company's sales average $3 million per day. If Dexter could reduce the time between customers' mailing their payments and the funds' becoming collected balances by 2.5 days, what would be the increase in the firm's average cash balance? a. $3.5M b. $5.5M c. $6M d. $7.5M ANSWER: d Increase in Avg. Cash Balance = Average Daily Sales x Decrease in Payment Processing Time = $3,000,000 x 2.5 = $7,500, Dexter Instrument Company's sales average $3 million per day. Dexter could reduce the time between customers' mailing their payments and the funds' becoming collected balances by 2.5 days to increase in the firm's average cash balance. Assuming that these additional funds can be invested

9 in marketable securities to yield 8.5 percent per year, determine the annual increase in Dexter's (pretax) earnings. a. $750,000 b. $637,500 c. $250,000 d. $857,500 ANSWER: b Increase in Avg. Cash Balance = Average Daily Sales x Decrease in Payment Processing Time = $3,000,000 x 2.5 = $7,500,000 Annual Increase in (Pre-tax) Earnings = Increase in Average Cash Balance x Interest Rate = $7,500,000 x = $637, Miranda Tool Company sells to retail hardware stores on credit terms of "net 30." Annual credit sales are $18 million and are spread evenly throughout the year. The company's variable cost ratio is 0.70, and its accounts receivable average $1.9 million. Using this information, determine the average daily credit sales (assume there are 365 days per year). a. $49,315 b. $5,205 c. $570,000 d. $46,719 Average daily credit sales = Annual Credit Sales = $18,000, =$49, Miranda Tool Company sells to retail hardware stores on credit terms of "net 30." Annual credit sales are $18 million and are spread evenly throughout the year. The company's variable cost ratio is 0.70, and its accounts receivable average $1.9 million. Assume there are 365 days per year. Using this information, what is the days sales outstanding? a b c. 39 d. 45 ANSWER: b

10 Average daily credit sales Days sales outstanding = Annual Credit Sales = $18,000, =$49,315 =Accounts receivable balance Average daily credit sales =$1,900,000 =38.5 days $49, The Milton Company currently purchases an average of $22,000 per day in raw materials on credit terms of "net 30." The company expects sales to increase substantially next year and anticipates that its raw material purchases will increase to an average of $25,000 per day. Milton feels that it may need to finance part of this sales expansion by stretching accounts payable. Assuming that Milton currently waits until the end of the credit period to pay its raw material suppliers, what is its current level of trade credit? (Assume a 365-day year when converting from annual to daily amounts or vice versa.) a. $750,000 b. $660,000 c. $90,000 d. $364,999 ANSWER: b Current trade credit (Accounts payable) = Average purchases per day x Credit period = $22,000/day x 30 days = $660, The Milton Company purchases an average of $22,000 per day in raw materials on credit terms of "net 30," and expects sales to increase substantially next year, increasing its raw material purchases to an average of $25,000 per day. Milton feels that it may need to finance part of this sales expansion by stretching accounts payable. Assume that Milton currently waits until the end of the credit period to pay its raw material suppliers, and find its current level of trade credit. (Assume a 365-day year when converting from annual to daily amounts or vice versa.) Now, if Milton stretches its accounts payable an extra 10 days beyond the due date next year, how much additional shortterm funds (that is, trade credit) will be generated? a. $340,000 b. $220,000 c. $250,000 d. $660,000 Current trade credit (Accounts payable) = Average purchases per day x Credit period = $22,000/day x 30 days

11 = $660,000 Trade credit (Next year) = $25,000/day x 40 days = $1,000,000 Additional trade credit = $1,000,000 - $660,000 = $340, The Pulaski Company has a line of credit with a bank under which it can borrow funds at an 8% interest rate. The company plans to borrow $100,000 and is required by the bank to maintain a 15% compensating balance. What is the annual financing cost of the loan if the company currently maintains $7,000 in its bank account that can be used to meet the compensating balance requirement. (Assume a 365-day borrowing period.) a. 7.6% b. 8.0% c. 8.7% d. 9.2% ANSWER: c Interest costs = $100,000 x 0.08 = $8,000 Additional compensating balance = $100,000 x.15 - $7,000 = $8,000 Usable funds = $100,000 - $8,000 = $92,000 Annual financing cost = ($8,000/$92,000) = 8.70% 10. The Pulaski Company has a line of credit with a bank under which it can borrow funds at an 8% interest rate. The company plans to borrow $100,000 and is required by the bank to maintain a 15% compensating balance. Determine the annual financing cost of the loan if the company currently has no funds in its account at the bank that can be used to meet the compensating balance requirement. (Assume a 365-day borrowing period.) a. 9.41% b. 8.50% c. 17.6% d. 7.41% Interest costs = $100,000 x 0.08 = $8,000 Additional compensating balance = $100,000 x.15 = $15,000 Usable funds = $100,000 - $15,000 = $85,000 Annual financing cost = ($8,000/$85,000) = 9.41% 11. Perry Chemicals is in the process of constructing a financial plan for the coming year. It has estimated that fixed assets will be equal to 200,000,000 for the year and that current asset requirements vary between a minimum of 50,000,000 and a maximum of 80,000,000 during the year. What is the amount of permanent assets? a. 30,000,000 b. 130,000,000

12 c. 150,000,000 d. 250,000,000 ANSWER: d Permanent Assets = Fixed Assets + Permanent Current Assets = 200,000, ,000,000 = 250,000, Perry Chemicals is in the process of constructing a financial plan for the coming year. It has estimated that fixed assets will be equal to 200,000,000 for the year and that current asset requirements vary between a minimum of 50,000,000 and a maximum of 80,000,000 during the year. What is the amount of maximum temporary assets? a. 30,000,000 b. 130,000,000 c. 150,000,000 d. 250,000,000 Maximum Temporary Assets = Maximum Total Assets - Permanent Assets = 280,000, ,000,000 = 30,000, What is the nominal annual cost of trade credit given payment terms offering a 3% discount if payment is received 15 days after purchase or payment in full is due in 45 days (Assume 360 days per year)? a. 36% b % c % d. 30% ANSWER: b 14. Rhine River Products is considering changing to a cash management system that would reduce its mail delay from 3 days to 1 day and totally eliminate its processing delay of 2 days. On average,

13 the firm collects DM75,000 of credit sales per day. The firm's marginal tax rate is 46%, and its required rate of return on the system is 15%. What amount of funds would be made available if Rhine River switched to the proposed system? a. DM300,000 b. DM18,750 c. DM11,250 d. DM345,000 Funds Available R = (DM75,000)(4) = DM300, Rhine River Products is considering changing to a cash management system that would reduce its mail delay from 3 days to 1 day and totally eliminate its processing delay of 2 days. On average, the firm collects DM75,000 of credit sales per day. The firm's marginal tax rate is 46%, and its required rate of return on the system is 15%. What compensating balance requirement would the firm be willing to accept if the system is implemented? a. DM300,000 b. DM18,750 c. DM11,250 d. DM345,000 Funds Available R = (DM75,000)(4) = DM300,000 NPV = DM300,000 - Maximum Compensating Balance = 0 Maximum Compensating Balance = DM300, Pentec Electric is in the process of forecasting accounts receivable. However, the company is unsure of the amount of credit sales and whether the days sales outstanding will be 30 or 40 days. If annual credit sales are $45 million, what is the balance in accounts receivable for a DSO of 30 and a DSO of 40 (Assume 360 days per year)? a. $3,750,000; $5,000,000 b. $5,000,000; $1,500,000 c. $1,500,000; $1,125,000 d. $5,125,000; $3,750,000

14 17. Pentec Electric is in the process of forecasting accounts receivable. However, the company is unsure of the amount of credit sales and whether the days sales outstanding will be 30 or 40 days. If annual credit sales are $60 million, find the balance in accounts receivable for a DSO of 30 and a DSO of 40. a. $3,750,000; $5,000,000 b. $5,000,000; $6,500,000 c. $5,000,000; $6,666,667 d. $5,125,000; $6,666,667 ANSWER: c 18. In order to attract new customers, Media Technique is considering changing its credit terms from net 30 to net 60. Currently, Media's days sales outstanding is 40 days and is expected to increase to 70 days if the terms are extended to net 60. The liberal credit period is expected to add FF30,000,000 in new annual sales to the current sales level of FF150,000,000. What is Media's current balance in accounts receivable (Assume 360 days per year)? a. FF120,000,000 b. FF375,000 c. FF16,666,667 d. FF41,666,667 ANSWER: c 19. In order to attract new customers, Media Technique is considering changing its credit terms from net 30 to net 60. Currently, Media's days sales outstanding is 40 days and is expected to increase to 70 days if the terms are extended to net 60. The liberal credit period is expected to add FF30,000,000 in new annual sales to the current sales level of FF150,000,000. What will Media's

15 balance in accounts receivable be if the longer credit period is made effective (Assume 360 days per year)? a. FF35,000,000 b. FF29,166,667 c. FF5,833,333 d. FF10,500, South-Western, All Rights Reserved.