$9.$ Problem $22-09($Short$-$Term Financing Analysis$)$

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Short$-$Term Financing Analysis

Malone Feed and Supply Company buys on terms of $1/10,$ net $30,$ but it has not been taking discounts and has actually been paying in $60$ rather than $30$ days. Assume that the accounts payable are recorded at full cost, not net of discounts. Malone$$s balance sheet follows:

Cash $ $45,000$ Accounts payable $ $500,000$

Accounts receivable $455,000$ Notes payable $45,000$

Inventory $710,000$ Accruals $45,000$

Current assets $ $1,210,000$ Current liabilities $ $590,000$

Long$-$term debt $200,000$

Fixed assets $710,000$ Common equity $1,130,000$

Total assets $ $1,920,000$ Total liabilities and equity $ $1,920,000$

Malone$$s suppliers are threatening to stop shipments unless the company begins making prompt payments $($that is$,$ paying within $30).$ The firm can borrow on a $1-$year note $($call this a current liability$)$ from its bank at a rate of $14\%$ discount interest with a $20\%$ compensating balance required. $($Malone$$s $$45,000$ in cash is needed for transactions; it cannot be used as part of the compensating balance.$)$

How large would the accounts payable balance be if Malone takes discounts? Do not round intermediate calculations. Round your answer to the nearest dollar.

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How large would the accounts payable balance be if it does not take discounts and pays in $30$ days? Do not round intermediate calculations. Round your answer to the nearest dollar.

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How large must the bank loan be if Malone takes discounts? Do not round intermediate calculations. Round your answer to the nearest cent.

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How large must the bank loan be if Malone doesn$$t take discounts? Do not round intermediate calculations. Round your answer to the nearest cent.

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Assuming a $360-$day year, what are the nominal and effective rates of costly trade credit? Assume there is $1\%$ discount. Do not round intermediate calculations. Round your answers to two decimal places.

Nominal rate:

$\%$

Effective rate:

$\%$

What is the effective rate of the bank loan? Round your answer to two decimal places.

$\%$

Based on these costs, what should Malone do$?$

$-$Select$-$

Assume Malone forgoes the discount and borrows the amount needed to become current on its payables. Construct a projected balance sheet based on this decision. $($Hint: You will need to include an account called $$prepaid interest$$ under current assets.$)$ Do not round intermediate calculations. Round your answers to the nearest dollar.

Cash $

Accounts payable $

Accounts receivable

Notes payable

Inventory

Accruals

Prepaid interest

Total current assets $

Total current liabilities $

Fixed assets

Long$-$term debt

Common equity

Total assets $

Total liabilities and equity $

Now assume that the $$500,000$ shown on the balance sheet is recorded net of discounts. How much would Malone have to pay its suppliers in order to reduce its accounts payable to $$250,000?$ Assume there is $1\%$ discount. Do not round intermediate calculations. Round your answer to the nearest cent.

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If Malone$$s tax rate is $40\%,$ then what is the effect on its net income due to the lost discount when it reduces its accounts payable to $$250,000?$ Do not round intermediate calculations. Round your answer to the nearest cent.

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How much would Malone have to borrow? $($Hint: Malone will receive a tax deduction due to the lost discount, which will affect the amount it must borrow.$)$ Do not round intermediate calculations. Round your answer to the nearest cent.

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Construct a projected balance sheet based on this scenario. $($Hint: You will need to include an account called $$prepaid interest$$ under current assets and then adjust retained earnings by the after$-$tax amount of the lost discount.$)$ Do not round intermediate calculations. Round your answers to the nearest dollar.

Cash $

Accounts payable $

Accounts receivable

Notes payable

Inventory

Accruals

Prepaid interest

Total current assets $

Total current liabilities $

Fixed assets

Long$-$term debt

Common equity

Total assets $

Total liabilities and equity $