Bank Financing

The Raattama Corporation had sales of $3.2 million last year, and it earned a 5% return (after taxes) on sales. Recently, the company has fallen behind in its accounts payable. Although its terms of purchase are net 30 days, its accounts payable represent 59 days' purchases. The company's treasurer is seeking to increase bank borrowing in order to become current in meeting its trade obligations (that is, to have 30 days' payables outstanding). The company's balance sheet is as follows (in thousands of dollars):

Cash	$100		Accounts payable	$600
Accounts receivable	300		Bank loans	700
Inventory	1,400		Accruals	200
Current assets	$1,800		Current liabilities	$1,500
Land and buildings	600		Mortgage on real estate	700
Equipment	600		Common stock, $0.10 par	300
			Retained earnings	500
Total assets	$3,000		Total liabilities and equity	$3,000

1. How much bank financing is needed to eliminate the past-due accounts payable? Round your answer to the nearest dollar. $
2. Assume that the bank will lend the firm the amount calculated in Part a. The terms of the loan offered are 9%, simple interest, and the bank uses a 360-day year for the interest calculation. What is the interest charge for one month? (Assume there are 30 days in a month.) Round your answer to the nearest dollar. Do not round intermediate calculations. $
3. Now ignore Part b and assume that the bank will lend the firm the amount calculated in Part a. The terms of the loan are 7.5%, add-on interest, to be repaid in 12 monthly installments. Do not round intermediate calculations.
   1. What is the total loan amount? Round your answer to the nearest dollar. $
   2. What are the monthly installments? Round your answer to the nearest dollar. $
   3. What is the APR of the loan? Round your answer to two decimal places. %
   4. What is the effective rate of the loan? Round your answer to two decimal places. %
4. Would you, as a bank loan officer, make this loan?