Money market instruments in the U.S. are issued with less than 1 year to maturity. They pay simple interest. This applies as well to bank loans and deposits. In these cases, the interest rate, r, in the simple interest formula is multiplied by the fraction of the year the investment or bank deposit is held. In the U.S., a 360-day year is assumed for the fraction denominator:

• 100x(1+rxdaysininvestmentperiod/360)
• 1.

A company borrows $5 million from a bank for two weeks at 3%. How much interest is owed?

II A company borrows $5 million from a bank for six months at 4% beginning October 5. How much interest is owed?

III Suppose the borrowing in question II represented a drawdown from a credit line of $7,500,000. The bank charges a quarter% for any unused line. In the second half of the year, the company borrowed an additional $1 million. How much does the company owe the bank for the year?

IV NJCU Rotisserie begins the year with:

$100,000 in owners equity; $50,000 million in a bank loan

$60,000 equipment; $25,000 material; $25,000 inventory; $40,000 cash

During the year it earns $20,000 in profits after taxes.

Display the new balance sheet at the end of the year (beginning of next year) and calculate the new leverage ratio if RR:

• distributes 50% of profits as dividends; retains the remaining in cash
• pays no dividends, retains the entire amount in cash
• pays no dividends, uses profits to purchase equipment
• pays no dividends, uses profits to repay part of the bank loan

V ABC Corporation experienced the following in 2015:

Revenue $500,000

Variable cost $225,000

Overhead $40,000

Interest payment $50,000

Depreciation $18,000

Profits tax rate 20%

What was its coverage ratio (using EBITD) for the year?

How does the coverage ratio change if the tax rate is 30%?

VI Truly Magnificent Shoe Company had the following balance sheet at the beginning of 2015:

$5 million in owners equity; 2 million in debt

$2 million equipment; $2.5 million material; $2.5 million cash

It manufactures and sells 105,000 pairs of truly magnificent shoes at $75/pair.

However, one customer who bought 5,000 pairs, purchased on credit, to be paid in 2016.

Variable costs are $60/pair

Rent $600,000

Interest payment $125,000

TMSC distributes 40% of after-tax profits in dividends.

Follow the Cash to show the net change in cash position at year end.

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