Question C - The HES Corporation had sales of $3.5 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 represents 60 days purchases. The companys 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 companys balance sheet is as follows (in thousands of dollars):

1- How much bank financing is needed to eliminate the past-due accounts payable?

2- Assume that the bank will lend the firm the amount calculated in Part 1. The terms of the loan offered are 8%, simple interest, and the bank uses a 360-day year for the interest calculation. What is the interest charge for 1 month? (Assume there are 30 days in a month.)

3- Now ignore Part 2 and assume that the bank will lend the firm the amount calculated in Part 1. The terms of the loan are 7.5%, add-on interest, to be repaid in 12 monthly installments.

1. a- What is the total loan amount?

2. b- What are the monthly installments?

3. c- What is the APR of the loan?

4. d- What is the effective rate of the loan?

5. e- Would you, as a bank loan officer, make this loan? Why or why not?

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