(Risk retum trade-off) CL Marshall Liquors owns and operates a chain of beer and wine shops throughout the DallasFort Worth metroplex The rapidiy expanding population of the area has ruited in the iirrn requiring a growing amount of lurlds Historicaliy. the rm has reinvested earnings and borrowed using shortiten'n bank notes. Balance sheets for the last 5 years are found in the popup window: a . 4:. Compute The lirnr's current ratio (current assets divided by cunent liabiliti) arid the nn's debt ratio (current plus longtenn liahitities divided by total assets) for the Swear period found above. Describe the nn's risk using both the current mlio and debt ratio. b. Alter the nancial statements above such that currerrt liabilities remain constant at $70 and longiterm liabilities increase in the arrrourrt needed to meet the tirrrr's nancing requirements. Compute the rrrr's current rao (current assets divided by current liabilities) and the rm's debt ratio (nunent plus longitemr liabilities divided by total assets) using the following revised nancial statements, a , you have prepared for the Swear period 20112915. Describe the rrn's risk using both the current ratio and debt ratio. 0. Which of the nancing plans is more risky? Why? .1. Compute The rm's current ratio and the nn's debt ratio tor the Siyear period using the rrn's balance sheet found in the following table. a . (Round to two decimal places.) 211 2912 2|]'13 214 215 Current ratio (Cost of a short-term bankloan) Jimmy Hale is the owner and operator of the grain elevator in Browneld, Texas, where he has lived tor most of his 52 years. The rains during the spring have been the best in a decade, and Mr. Hale is expecting a bumper wheat crop. This has prompted him to rethink his current nancing sources He now believes he will need an additional $200,000 for the 3-month period ending with the close of the harvest season. Alter meeting with his banker, Mr. Hale is puzzling over what the additional nancing will actually cost. The banker quoted him a rate 0| 1 percent over prime (which is currently '1' percent) and also requested that the rm increase its current bank balance oi $4. 000 up to 20 percent ofthe loan a. it interest and principal are all repaid at the end ofthe 3-month loan term, what is the annual percentage rate on the loan oer made by Mr. Haie's bank? I). lfthe hank were to olferto lower the rate to prime if interestis discounted, should Mr. Hale accept this alternative? Nefe: Assume a 30-day month and 360-day year. a. The annual percentage rate on The loan olfer made by Mr. Hale's bank is '54:. (Round to two decimal places.) (Estimating the cost of bank credit] Paymaster Enterpf'ses has arranged to nance its seasonal working-capital needs with a short-term bank loan The ioan will carry a rate of1E percent per annum with interest paid in advance (discounted) in addition' Paymaster must maintain a minimum demand deposit w'lh the bank of 1 1 percent ofthe loan balance throughout the telm of the loan, it Peymaster plans to borrow Miami] for a period of 3 months, what is the eitedive cost oftne bank loan? Hint Assume the Paymaster does not have sufcient fumh in the bank to satisfy the compensating balance (equirement, The eecve cost, or AFR, of the bank loan is? \"1 (Round to two decimal places] Nike Corp. buys on 3!"! I], net 30 days. What is me nominal cost of interest\" Nike does not take advantage of the trade disceum offered? Assume a 36!} dayr year. 0 A. 55.7% 0 B. 22.3% 0 C. 66.3% 0 D. 12.5% A oating Hen, chee! mortgage, or terminai warehouse receipt have which of the following in common? 0 A. They are elf unsecured forms of nancing. 0 B; They e11 uee inventory to secure a teen. 0 C1 Theyr have nothing in common. 0 D. They 311 pledge accounts receivables as security. AFB' inc purchases a new delivery Van which is expected to increase cash ows fur the next1lJ years, AFB can nance the purchase wilh a mandard 48 monlh vehicle loan, or by getting e1Dyearloan from lhe bank Accurding to the hedging principle AFB should 0 A. use lhe 48 month loan since it malches the type of asset with he type ofluan. O B. use Ihe 1|] 7 year nancing in order in match the cash llew stream lrum the asset will] The nancing repayments. O C. avoid using eilher lean and nance the muck with currenl cash reserves to avoid interest expense 0 D. use either type of nancing' but hedge the risk in [he apllons market, (E'ecve annuat rate) Compute the cost of the following trade uedit terms using the compounding formula, or eective annual rate. Note Assume a 30-day month and BSDday year. a. 2110, net 30 b. 3115, net 30 c. 3115, net 45 d. 2115' net 60 a. When payment is made on the net due date, the APR otthe credit terms of 211 0, net 3|] is '36. (Round to two decimal ptaces.) 1lr'ul'hioh otthe following is an advantage associated 1.vith the use of current versus long-term liabilities? {Select the best choice below.) 0 A. The interest cost of current liabilities is generally higher than long-term debt. 0 B. The rm's interest costs can vary from year to year. Q C. The use of current liabilities subjects the rm to greater risk of illiquiditv O D. All of the above. O E. None of the above. Spontaneous nancing consists of: [Seteot the beat choice below} 0 A. accounts payat-te. CI E. trade credit. 0 C. shortterm notes payable. C) D. Allof the above. C} E. A and B only. The SKC Corpcration plans to hnnnw $1,000 tor a 50-day perimi At maturity the lm will repay the $1,000 principal amount plus $50 interest What is ihe eective annual rate pf interest (APR) for the loan? (Seled the best choice below) 0 A. 5.00% O B. 21.55% {2. 20.00% 0 D. 509% 0 Data Table 2015 Current assets $25!] Fixed assets 34!] Total 5591] Current liabilities $231] Longterm liabilities Bl] DWnErBr e4q*..r'rt'_g|r 28E! Tutsi $591] {Utah on the teen feasted en the top-right comer of the data table above in order to copy its contents into a spreadsheet.) 2011 21312 E13 2914 EMS % Current assets $13!] $161] $190 $22!] 5250 Fixed assets 250 231] 3011 32!] 34!] "Fetal $391] $44!] $491] $541] 5591] Current liabilities sm Hm] Hm] t5?!) $Tt] Longterm liabilities El] 121] 1l] ZEN] 241] Owners' equityr 240 251] 251] 2?!) 281] Total 5 390 $441] $491] $54!] $591] (Stick on the Icon toasted en the tspright some: at the date tahte above in order tn copy its contents into a spreadsheet.) 0 Data Tabte - 21312 213 Zht 2015 % Current aseets $150 $191] $221] 5250 Fixed assets 28!] 331] 320 34!] Tutat $441] $491] $540 5591] Current liabilitiee $111] $151] $191] $231] Longterm liabilities SI] SI] SI] SI] Dwners' equity 251] 25!] 2H] 25!] Tutai E E m E {Stick on the teen faceted an the top-right comer of the date tebte above in order to copy its contents into a spreadsheet.) Answer is B- They all use inventory to secure a loan Answer is B The hedging principle implies that permanent asset investments should be financed with permanent sources ced with permanent sources a b c d Terms 2/10, net 30 3/15, net 30 3/15, net 45 2/15, net 60 Cost of trade credit APR 36.73% 43.86% 74.23% 107.72% 37.11% 44.12% 16.33% 17.54% Answer is D- All of the above Answer is D- All of the above Answer is B 21.55% Cost of trade credit 55.7% Interest paid Effective Loan taken (Loan-11% of loan-Interest paid in advance) Cost of credit for 90 days APR $ 3,600 $ 76,500 4.71% 20.19% a) Interest paid Effective Loan taken (Loan-11% of loan-balance in account) Cost of credit for 90 days APR b) Interest paid Effective Loan taken (Loan-(11% of loan-balance in account)-Interest paid in advance) Cost of credit for 90 days APR Yes, It should accept lower interest rate as it results in lower APR. $ 4,000 $ 164,000 2.44% 10.12% $ 3,500 $ 160,500 2.18% 9.01% a) Current Ratio Debt Ratio 2011 1.86 38.46% 2012 1.45 43.18% 2013 1.27 46.94% 2014 1.16 50.00% 2015 1.09 52.54% With decreasing current ratio, firm risk of default on payment of current liabilities is rising. Debt ratio is rising which shows that company is increasing it's use of debt which may result in higher b) Current Ratio Debt Ratio 2011 1.86 38.46% 2012 2.29 43.18% 2013 2.71 46.94% 2014 3.14 50.00% 2015 3.57 52.54% With increasing current ratio, firm risk of default on payment of current liabilities is decreasing. Debt ratio is rising which shows that company is increasing it's use of debt which may result in higher c) First plan is more risky as it can result in default in payment of current liability by the company. ent liabilities is rising. debt which may result in higher interest outgo. nt liabilities is decreasing. debt which may result in higher interest outgo. t liability by the company. (Coat of a shortrem bank loan) Jimmy Hale is the owner and operator of the grain elevator in Browneld. Texas, where he has lived for most of his 52 years. The rains during the spring have been the best in a decade. and Mr. Hale is expecting a bumper wheat crop. This has prompted him to rethink his current nancing sources. He now believes he will need an additional $200,0l] for the 3-month period ending with the close of the harvest season. Aer meeting with his banker, Mr. Hale is puzzling over what the additional nancing will actually cost. The banker quoted him a rate of} percent over prime (which is currently 7 percent) and also requested that the rm increase its current bank balance of $4.000 up to 20 percent ofthe loan. a. lf interest and principal are all repaid at the end of the 3month loan term, what is the annual percentage rate on the loan otter made by Mr. Hale's bank? b. if the bank were to offer to lower the rate to prime ifinterest is discounted, should Mr. Hale accept this alternative? Note: Assume a 30-day month and EBB-day year. a. The annual percentage rate on the loan oifer made by Mr. Hale's bank is 10.12 \"it. (Round to two decimal places.) I Sorry. that's not correct. STEP I: FORMULATE A SOLUTION STRATEGY Notice that the interest on the bank loan is not discounted in part (3). So, you can calculate for the interest cost on the loan as follows: Interest: principal x rate XEme Interest: $245,000 1: {1% + prime rate] x [9|] I 351]) Thenr solve torthe annual percentage rate {APR} as follows: interest APR = ' [principal requested compensating bala nee] X {9|} I 366) where the requested compensating balance = 20% x ($245,008) current bank balance. ,- ' L2 IOKl 29m _ _l re mafnl'nn Enter your answer in the answer box and then cii' (Coat of a shortrem bank loan) Jimmy Hale is the owner and operator of the grain elevator in Browneld. Texas, where he has lived for most of his 52 years. The rains during the spring have been the best in a decade. and Mr. Hale is expecting a bumper wheat crop. This has prompted him to rethink his current nancing sources. He now believes he will need an additional $200,0l] for the 3-month period ending with the close of the harvest season. Aer meeting with his banker, Mr. Hale is puzzling over what the additional nancing will actually cost. The banker quoted him a rate of} percent over prime (which is currently 7 percent) and also requested that the rm increase its current bank balance of $4.000 up to 20 percent ofthe loan. a. lf interest and principal are all repaid at the end of the 3month loan term, what is the annual percentage rate on the loan otter made by Mr. Hale's bank? b. if the bank were to offer to lower the rate to prime ifinterest is discounted, should Mr. Hale accept this alternative? Note: Assume a 30-day month and EBB-day year. a. The annual percentage rate on the loan oifer made by Mr. Hale's bank is 10.12 \"it. (Round to two decimal places.) I Sorry. that's not correct. STEP I: FORMULATE A SOLUTION STRATEGY Notice that the interest on the bank loan is not discounted in part (3). So, you can calculate for the interest cost on the loan as follows: Interest: principal x rate XEme Interest: $245,000 1: {1% + prime rate] x [9|] I 351]) Thenr solve torthe annual percentage rate {APR} as follows: interest APR = ' [principal requested compensating bala nee] X {9|} I 366) where the requested compensating balance = 20% x ($245,008) current bank balance. ,- ' L2 IOKl 29m _ _l re mafnl'nn Enter your answer in the answer box and then cii' (Estimating the cost of bank credit) Paymaster Enterprises has arranged to nance its seasonal working-capital needs with a shorttem'r bank. loan. The loan will carry a rate of 16 percent per annum with interest paid in advance (discounted). in addition, Paynraster mustmaintairr a minimum demand depositwith the bani: of 11 percent ofthe loan balance throughout the term of the loan. if Paymaster plans to borroir.I $90,000 for a period of3 months. what is the effective cost ofthe bank loan? Hint: Assume the Paymaster does not have sufcient Funds In the bank to satishr the compensation baiance reouirement. The eec'rive cost, MAPR, of the bank loan is? 29.19 \"9E {Round to two decimal places.) Enter your answer in the answer box and then All parts showing 3 Sorry, that's not correct. STEP 1: FORMULATE A SOLUTION STRATEGY The procedure for estimating the costof shortterm credit is a tier}.I sirnpie one and relies on the basic interest equation: Interest: principal x rate xtime where interest is the dollar amount of interest on a pn'ncr'pai that is borrowed at some annual rate for a fraction of the year [represented by tune}. We use this basic relationship to sohre tor the cost of a source at shortterm nancing or the annual percentage rate {APR} when the interest amount, the principal sum, and the time period for nancing are known. Thus, solving the basic interest equation for APR produces, interest interest 1 APR = . or f X . pnncrpal X IllTIE pnncrpal tame Note that in the APR formula the principal must be adjusted due to: a. A compensating batanoe of 11 percent of the loan balance is used to maintain a minimum demand deposit. b. The loan interest is deducted from the teen amount before the funds are transfered to Paymaster Enterprises. m X CheckAnswer I 4 C! b Bonus Question 15-1 (static) Which of the following is an advantage associated with the use of current versus longterm liabilities? {Select the best choice below.) CI A. The interest cost of current liabilities is generally higher than long-term debL Ci B. The rm's interest costs can vary horn year to yea r. C} C. The use of current liabilities subjects the rm to greater risk of illiquidity. @I D. All ofthe above. 0 E. None-ofthe above. 3 Sorry. that's not correct. Please try again. := QUE Spontaneous nancing consists et (Seleci'fhe best choice below.) 0 A. accounts payable. 0 B. trade credit. (:3 C1 shorttenn notes payable. IE) D; All ofthe above. C) E. A and B only. 3 Sorry, that's not correct. X Spontaneous sources 01 nancing include all those sources thai are available upon demand or that arise naturally as a part of doing business. The SKC Corporation plans to borrow $1,060 for a 90day period. At maturity the rm will repay the $1,001] pn'ncipai amount plus $50 interest. What is the eective annual rate of interest {APR} for the loan? {Select the best choice below.) Bookmatch 15-10 (book/static} 55 Question Help (Effective annual rate) Compute the cost of the following trade credit ten'ns using the compounding formula, or effective annual rate. Note: Assume a 30dayI month and SEED-day year. 3 Sorry, that's not correct. X STEP 1: FORMULATE A SOLUTION STRATEGY Trade credit provides one of the most exible sources ofshmttenn nancing available to a rm. \\i'en,r often the credit terms altered with trade credit involve a cash discount for early.r payment For example, a supplier might offer terms of 24"10, net 30, which means that a 2 percent discount is offered if payment is made within 10 days or the full amount is due in 30 days. Thus, a 2 percent penalty is involved for not paying within 10 days, or for delaying payment from the tenth to the tirtierth clayl [that is, 2!} days}. You can use the basic APR equation to estimate the cost of shortterm credit: interest interest 1 APR: , _ _ or _ _ X. pnnc1pal thme pnnCIpal time Using a $1 invoice amount, the effective cost of passing up the discount pen'od using the preceding credit terms can be calculated as follows: $0.02 x 1 $0.98 2|] 1' 350 APR = Note that the 2 percent cash discount is the interest cost of extending the payment period an eddionai 20 (30 10) days. Note aha that the principal amount of the credit is $0.98. This amount constitutes the full pn'ncipal amount as of the tenth dag.r of the credit period, after which time the cash discount is lost. mi 0 is 43.35 98. {Round to two decimal places.) CheckAnswer i { Answer is B- They all use inventory to secure a loan Answer is B The hedging principle implies that permanent asset investments should be financed with permanent sources ced with permanent sources a b c d Terms 2/10, net 30 3/15, net 30 3/15, net 45 2/15, net 60 Cost of trade credit APR 36.73% 43.86% 74.23% 107.72% 37.11% 44.12% 16.33% 17.54% Answer is E Answer is D- All of the above Answer is B 20.00% Cost of trade credit 55.7% Interest paid $ 3,600 Effective Loan taken (Loan-11% of loan-Interest paid in advance) APR $ 76,500 18.82% a) Interest paid Effective Loan taken (Loan-11% of loan-balance in account) APR b) Interest paid Effective Loan taken (Loan-(11% of loan-balance in account)-Interest paid in advance) APR Yes, It should accept lower interest rate as it results in lower APR. $ 4,000 $ 164,000 9.76% $ 3,500 $ 160,500 8.72% a) Current Ratio Debt Ratio 2011 1.86 38.46% 2012 1.45 43.18% 2013 1.27 46.94% 2014 1.16 50.00% 2015 1.09 52.54% With decreasing current ratio, firm risk of default on payment of current liabilities is rising. Debt ratio is rising which shows that company is increasing it's use of debt which may result in higher b) Current Ratio Debt Ratio 2011 1.86 38.46% 2012 2.29 43.18% 2013 2.71 46.94% 2014 3.14 50.00% 2015 3.57 52.54% With increasing current ratio, firm risk of default on payment of current liabilities is decreasing. Debt ratio is rising which shows that company is increasing it's use of debt which may result in higher c) First plan is more risky as it can result in default in payment of current liability by the company. ent liabilities is rising. debt which may result in higher interest outgo. nt liabilities is decreasing. debt which may result in higher interest outgo. t liability by the company. c. The rst plan is much more risky to the im in that The fiim's current nancial obligations are a mud1 lower percent of the rm's current assets, (Select fmm the dropdown menus ) Answer is B- They all use inventory to secure a loan Answer is B The hedging principle implies that permanent asset investments should be financed with permanent sources ced with permanent sources a b c d Terms 2/10, net 30 3/15, net 30 3/15, net 45 2/15, net 60 Cost of trade credit APR 36.73% 43.86% 74.23% 107.72% 37.11% 44.12% 16.33% 17.54% Answer is E Answer is D- All of the above Answer is B 20.00% Cost of trade credit 55.7% Interest paid $ 3,600 Effective Loan taken (Loan-11% of loan-Interest paid in advance) APR $ 76,500 18.82% a) Interest paid Effective Loan taken (Loan-11% of loan-balance in account) APR b) Interest paid Effective Loan taken (Loan-(11% of loan-balance in account)-Interest paid in advance) APR Yes, It should accept lower interest rate as it results in lower APR. $ 4,000 $ 164,000 9.76% $ 3,500 $ 160,500 8.72% a) Current Ratio Debt Ratio 2011 1.86 38.46% 2012 1.45 43.18% 2013 1.27 46.94% 2014 1.16 50.00% 2015 1.09 52.54% With decreasing current ratio, firm risk of default on payment of current liabilities is rising. Debt ratio is rising which shows that company is increasing it's use of debt which may result in higher b) Current Ratio Debt Ratio 2011 1.86 38.46% 2012 2.29 43.18% 2013 2.71 46.94% 2014 3.14 50.00% 2015 3.57 52.54% With increasing current ratio, firm risk of default on payment of current liabilities is decreasing. Debt ratio is rising which shows that company is increasing it's use of debt which may result in higher c) First plan is more risky as it can result in default in payment of current liability by the company. ent liabilities is rising. debt which may result in higher interest outgo. nt liabilities is decreasing. debt which may result in higher interest outgo. t liability by the company. Bookmatch 15-10 (book/static} 55 Question Help (Effective annual rate) Compute the cost of the following trade credit ten'ns using the compounding formula, or effective annual rate. Note: Assume a 30dayI month and SEED-day year. 3 Sorry, that's not correct. X STEP 1: FORMULATE A SOLUTION STRATEGY Trade credit provides one of the most exible sources ofshmttenn nancing available to a rm. \\i'en,r often the credit terms altered with trade credit involve a cash discount for early.r payment For example, a supplier might offer terms of 24"10, net 30, which means that a 2 percent discount is offered if payment is made within 10 days or the full amount is due in 30 days. Thus, a 2 percent penalty is involved for not paying within 10 days, or for delaying payment from the tenth to the tirtierth clayl [that is, 2!} days}. You can use the basic APR equation to estimate the cost of shortterm credit: interest interest 1 APR: , _ _ or _ _ X. pnnc1pal thme pnnCIpal time Using a $1 invoice amount, the effective cost of passing up the discount pen'od using the preceding credit terms can be calculated as follows: $0.02 x 1 $0.98 2|] 1' 350 APR = Note that the 2 percent cash discount is the interest cost of extending the payment period an eddionai 20 (30 10) days. Note aha that the principal amount of the credit is $0.98. This amount constitutes the full pn'ncipal amount as of the tenth dag.r of the credit period, after which time the cash discount is lost. mi 0 is 43.35 98. {Round to two decimal places.) CheckAnswer i { Bonus Question 15-1 (static) Which of the following is an advantage associated with the use of current versus longterm liabilities? {Select the best choice below.) CI A. The interest cost of current liabilities is generally higher than long-term debL Ci B. The rm's interest costs can vary horn year to yea r. C} C. The use of current liabilities subjects the rm to greater risk of illiquidity. @I D. All ofthe above. 0 E. None-ofthe above. 3 Sorry. that's not correct. Please try again. := QUE Spontaneous nancing consists et (Seleci'fhe best choice below.) 0 A. accounts payable. 0 B. trade credit. (:3 C1 shorttenn notes payable. IE) D; All ofthe above. C) E. A and B only. 3 Sorry, that's not correct. X Spontaneous sources 01 nancing include all those sources thai are available upon demand or that arise naturally as a part of doing business. {Effective annual rate] Compute the cost of the following trade credit terms using the compounding formula, or eectjve annual rate. Note: Assume a 30day menth and EBBday year. a.2f1[i, net 30 b. 3915, net 30 c.34'15, net 45 d. 2F15,net6[3 a. When payment is made on the net due date, the APR of the credit ten'ns of 21'1 0, net 3|] is BET-33%. (Round to two decimai places.) The EAR of the credit terms of 2m], net 30 is D'i. (Round to two decimal places] 0 Data Table 2015 Current assets $25!] Fixed assets 34!] Total 5591] Current liabilities $231] Longterm liabilities Bl] DWnErBr e4q*..r'rt'_g|r 28E! Tutsi $591] {Utah on the teen feasted en the top-right comer of the data table above in order to copy its contents into a spreadsheet.) 2011 21312 E13 2914 EMS % Current assets $13!] $161] $190 $22!] 5250 Fixed assets 250 231] 3011 32!] 34!] "Fetal $391] $44!] $491] $541] 5591] Current liabilities sm Hm] Hm] t5?!) $Tt] Longterm liabilities El] 121] 1l] ZEN] 241] Owners' equityr 240 251] 251] 2?!) 281] Total 5 390 $441] $491] $54!] $591] (Stick on the Icon toasted en the tspright some: at the date tahte above in order tn copy its contents into a spreadsheet.) 0 Data Tabte - 21312 213 Zht 2015 % Current aseets $150 $191] $221] 5250 Fixed assets 28!] 331] 320 34!] Tutat $441] $491] $540 5591] Current liabilitiee $111] $151] $191] $231] Longterm liabilities SI] SI] SI] SI] Dwners' equity 251] 25!] 2H] 25!] Tutai E E m E {Stick on the teen faceted an the top-right comer of the date tebte above in order to copy its contents into a spreadsheet.) Answer is B- They all use inventory to secure a loan Answer is B The hedging principle implies that permanent asset investments should be financed with permanent sources ced with permanent sources a b c d Terms 2/10, net 30 3/15, net 30 3/15, net 45 2/15, net 60 Cost of trade credit APR 36.73% 43.86% 74.23% 107.72% 37.11% 44.12% 16.33% 17.54% Answer is D- All of the above Answer is D- All of the above Answer is B 21.55% Cost of trade credit 55.7% Interest paid Effective Loan taken (Loan-11% of loan-Interest paid in advance) Cost of credit for 90 days APR $ 3,600 $ 76,500 4.71% 20.19% a) Interest paid Effective Loan taken (Loan-11% of loan-balance in account) Cost of credit for 90 days APR b) Interest paid Effective Loan taken (Loan-(11% of loan-balance in account)-Interest paid in advance) Cost of credit for 90 days APR Yes, It should accept lower interest rate as it results in lower APR. $ 4,000 $ 164,000 2.44% 10.12% $ 3,500 $ 160,500 2.18% 9.01% a) Current Ratio Debt Ratio 2011 1.86 38.46% 2012 1.45 43.18% 2013 1.27 46.94% 2014 1.16 50.00% 2015 1.09 52.54% With decreasing current ratio, firm risk of default on payment of current liabilities is rising. Debt ratio is rising which shows that company is increasing it's use of debt which may result in higher b) Current Ratio Debt Ratio 2011 1.86 38.46% 2012 2.29 43.18% 2013 2.71 46.94% 2014 3.14 50.00% 2015 3.57 52.54% With increasing current ratio, firm risk of default on payment of current liabilities is decreasing. Debt ratio is rising which shows that company is increasing it's use of debt which may result in higher c) First plan is more risky as it can result in default in payment of current liability by the company. ent liabilities is rising. debt which may result in higher interest outgo. nt liabilities is decreasing. debt which may result in higher interest outgo. t liability by the company. (Coat of a shortrem bank loan) Jimmy Hale is the owner and operator of the grain elevator in Browneld. Texas, where he has lived for most of his 52 years. The rains during the spring have been the best in a decade. and Mr. Hale is expecting a bumper wheat crop. This has prompted him to rethink his current nancing sources. He now believes he will need an additional $200,0l] for the 3-month period ending with the close of the harvest season. Aer meeting with his banker, Mr. Hale is puzzling over what the additional nancing will actually cost. The banker quoted him a rate of} percent over prime (which is currently 7 percent) and also requested that the rm increase its current bank balance of $4.000 up to 20 percent ofthe loan. a. lf interest and principal are all repaid at the end of the 3month loan term, what is the annual percentage rate on the loan otter made by Mr. Hale's bank? b. if the bank were to offer to lower the rate to prime ifinterest is discounted, should Mr. Hale accept this alternative? Note: Assume a 30-day month and EBB-day year. a. The annual percentage rate on the loan oifer made by Mr. Hale's bank is 10.12 \"it. (Round to two decimal places.) I Sorry. that's not correct. STEP I: FORMULATE A SOLUTION STRATEGY Notice that the interest on the bank loan is not discounted in part (3). So, you can calculate for the interest cost on the loan as follows: Interest: principal x rate XEme Interest: $245,000 1: {1% + prime rate] x [9|] I 351]) Thenr solve torthe annual percentage rate {APR} as follows: interest APR = ' [principal requested compensating bala nee] X {9|} I 366) where the requested compensating balance = 20% x ($245,008) current bank balance. ,- ' L2 IOKl 29m _ _l re mafnl'nn Enter your answer in the answer box and then cii' (Coat of a shortrem bank loan) Jimmy Hale is the owner and operator of the grain elevator in Browneld. Texas, where he has lived for most of his 52 years. The rains during the spring have been the best in a decade. and Mr. Hale is expecting a bumper wheat crop. This has prompted him to rethink his current nancing sources. He now believes he will need an additional $200,0l] for the 3-month period ending with the close of the harvest season. Aer meeting with his banker, Mr. Hale is puzzling over what the additional nancing will actually cost. The banker quoted him a rate of} percent over prime (which is currently 7 percent) and also requested that the rm increase its current bank balance of $4.000 up to 20 percent ofthe loan. a. lf interest and principal are all repaid at the end of the 3month loan term, what is the annual percentage rate on the loan otter made by Mr. Hale's bank? b. if the bank were to offer to lower the rate to prime ifinterest is discounted, should Mr. Hale accept this alternative? Note: Assume a 30-day month and EBB-day year. a. The annual percentage rate on the loan oifer made by Mr. Hale's bank is 10.12 \"it. (Round to two decimal places.) I Sorry. that's not correct. STEP I: FORMULATE A SOLUTION STRATEGY Notice that the interest on the bank loan is not discounted in part (3). So, you can calculate for the interest cost on the loan as follows: Interest: principal x rate XEme Interest: $245,000 1: {1% + prime rate] x [9|] I 351]) Thenr solve torthe annual percentage rate {APR} as follows: interest APR = ' [principal requested compensating bala nee] X {9|} I 366) where the requested compensating balance = 20% x ($245,008) current bank balance. ,- ' L2 IOKl 29m _ _l re mafnl'nn Enter your answer in the answer box and then cii' (Estimating the cost of bank credit) Paymaster Enterprises has arranged to nance its seasonal working-capital needs with a shorttem'r bank. loan. The loan will carry a rate of 16 percent per annum with interest paid in advance (discounted). in addition, Paynraster mustmaintairr a minimum demand depositwith the bani: of 11 percent ofthe loan balance throughout the term of the loan. if Paymaster plans to borroir.I $90,000 for a period of3 months. what is the effective cost ofthe bank loan? Hint: Assume the Paymaster does not have sufcient Funds In the bank to satishr the compensation baiance reouirement. The eec'rive cost, MAPR, of the bank loan is? 29.19 \"9E {Round to two decimal places.) Enter your answer in the answer box and then All parts showing 3 Sorry, that's not correct. STEP 1: FORMULATE A SOLUTION STRATEGY The procedure for estimating the costof shortterm credit is a tier}.I sirnpie one and relies on the basic interest equation: Interest: principal x rate xtime where interest is the dollar amount of interest on a pn'ncr'pai that is borrowed at some annual rate for a fraction of the year [represented by tune}. We use this basic relationship to sohre tor the cost of a source at shortterm nancing or the annual percentage rate {APR} when the interest amount, the principal sum, and the time period for nancing are known. Thus, solving the basic interest equation for APR produces, interest interest 1 APR = . or f X . pnncrpal X IllTIE pnncrpal tame Note that in the APR formula the principal must be adjusted due to: a. A compensating batanoe of 11 percent of the loan balance is used to maintain a minimum demand deposit. b. The loan interest is deducted from the teen amount before the funds are transfered to Paymaster Enterprises. m X CheckAnswer I 4 C! b Bonus Question 15-1 (static) Which of the following is an advantage associated with the use of current versus longterm liabilities? {Select the best choice below.) CI A. The interest cost of current liabilities is generally higher than long-term debL Ci B. The rm's interest costs can vary horn year to yea r. C} C. The use of current liabilities subjects the rm to greater risk of illiquidity. @I D. All ofthe above. 0 E. None-ofthe above. 3 Sorry. that's not correct. Please try again. := QUE Spontaneous nancing consists et (Seleci'fhe best choice below.) 0 A. accounts payable. 0 B. trade credit. (:3 C1 shorttenn notes payable. IE) D; All ofthe above. C) E. A and B only. 3 Sorry, that's not correct. X Spontaneous sources 01 nancing include all those sources thai are available upon demand or that arise naturally as a part of doing business. The SKC Corporation plans to borrow $1,060 for a 90day period. At maturity the rm will repay the $1,001] pn'ncipai amount plus $50 interest. What is the eective annual rate of interest {APR} for the loan? {Select the best choice below.) Bookmatch 15-10 (book/static} 55 Question Help (Effective annual rate) Compute the cost of the following trade credit ten'ns using the compounding formula, or effective annual rate. Note: Assume a 30dayI month and SEED-day year. 3 Sorry, that's not correct. X STEP 1: FORMULATE A SOLUTION STRATEGY Trade credit provides one of the most exible sources ofshmttenn nancing available to a rm. \\i'en,r often the credit terms altered with trade credit involve a cash discount for early.r payment For example, a supplier might offer terms of 24"10, net 30, which means that a 2 percent discount is offered if payment is made within 10 days or the full amount is due in 30 days. Thus, a 2 percent penalty is involved for not paying within 10 days, or for delaying payment from the tenth to the tirtierth clayl [that is, 2!} days}. You can use the basic APR equation to estimate the cost of shortterm credit: interest interest 1 APR: , _ _ or _ _ X. pnnc1pal thme pnnCIpal time Using a $1 invoice amount, the effective cost of passing up the discount pen'od using the preceding credit terms can be calculated as follows: $0.02 x 1 $0.98 2|] 1' 350 APR = Note that the 2 percent cash discount is the interest cost of extending the payment period an eddionai 20 (30 10) days. Note aha that the principal amount of the credit is $0.98. This amount constitutes the full pn'ncipal amount as of the tenth dag.r of the credit period, after which time the cash discount is lost. mi 0 is 43.35 98. {Round to two decimal places.) CheckAnswer i { Answer is B- They all use inventory to secure a loan Answer is B The hedging principle implies that permanent asset investments should be financed with permanent sources ced with permanent sources a b c d Terms 2/10, net 30 3/15, net 30 3/15, net 45 2/15, net 60 Cost of trade credit APR 36.73% 43.86% 74.23% 107.72% 37.11% 44.12% 16.33% 17.54% Answer is E Answer is D- All of the above Answer is B 20.00% Cost of trade credit 55.7% Interest paid $ 3,600 Effective Loan taken (Loan-11% of loan-Interest paid in advance) APR $ 76,500 18.82% a) Interest paid Effective Loan taken (Loan-11% of loan-balance in account) APR b) Interest paid Effective Loan taken (Loan-(11% of loan-balance in account)-Interest paid in advance) APR Yes, It should accept lower interest rate as it results in lower APR. $ 4,000 $ 164,000 9.76% $ 3,500 $ 160,500 8.72% a) Current Ratio Debt Ratio 2011 1.86 38.46% 2012 1.45 43.18% 2013 1.27 46.94% 2014 1.16 50.00% 2015 1.09 52.54% With decreasing current ratio, firm risk of default on payment of current liabilities is rising. Debt ratio is rising which shows that company is increasing it's use of debt which may result in higher b) Current Ratio Debt Ratio 2011 1.86 38.46% 2012 2.29 43.18% 2013 2.71 46.94% 2014 3.14 50.00% 2015 3.57 52.54% With increasing current ratio, firm risk of default on payment of current liabilities is decreasing. Debt ratio is rising which shows that company is increasing it's use of debt which may result in higher c) First plan is more risky as it can result in default in payment of current liability by the company. ent liabilities is rising. debt which may result in higher interest outgo. nt liabilities is decreasing. debt which may result in higher interest outgo. t liability by the company. c. The rst plan is much more risky to the im in that The fiim's current nancial obligations are a mud1 lower percent of the rm's current assets, (Select fmm the dropdown menus ) Answer is B- They all use inventory to secure a loan Answer is B The hedging principle implies that permanent asset investments should be financed with permanent sources ced with permanent sources a b c d Terms 2/10, net 30 3/15, net 30 3/15, net 45 2/15, net 60 Cost of trade credit APR 36.73% 43.86% 74.23% 107.72% 37.11% 44.12% 16.33% 17.54% Answer is E Answer is D- All of the above Answer is B 20.00% Cost of trade credit 55.7% Interest paid $ 3,600 Effective Loan taken (Loan-11% of loan-Interest paid in advance) APR $ 76,500 18.82% a) Interest paid Effective Loan taken (Loan-11% of loan-balance in account) APR b) Interest paid Effective Loan taken (Loan-(11% of loan-balance in account)-Interest paid in advance) APR Yes, It should accept lower interest rate as it results in lower APR. $ 4,000 $ 164,000 9.76% $ 3,500 $ 160,500 8.72% a) Current Ratio Debt Ratio 2011 1.86 38.46% 2012 1.45 43.18% 2013 1.27 46.94% 2014 1.16 50.00% 2015 1.09 52.54% With decreasing current ratio, firm risk of default on payment of current liabilities is rising. Debt ratio is rising which shows that company is increasing it's use of debt which may result in higher b) Current Ratio Debt Ratio 2011 1.86 38.46% 2012 2.29 43.18% 2013 2.71 46.94% 2014 3.14 50.00% 2015 3.57 52.54% With increasing current ratio, firm risk of default on payment of current liabilities is decreasing. Debt ratio is rising which shows that company is increasing it's use of debt which may result in higher c) First plan is more risky as it can result in default in payment of current liability by the company. ent liabilities is rising. debt which may result in higher interest outgo. nt liabilities is decreasing. debt which may result in higher interest outgo. t liability by the company. Bookmatch 15-10 (book/static} 55 Question Help (Effective annual rate) Compute the cost of the following trade credit ten'ns using the compounding formula, or effective annual rate. Note: Assume a 30dayI month and SEED-day year. 3 Sorry, that's not correct. X STEP 1: FORMULATE A SOLUTION STRATEGY Trade credit provides one of the most exible sources ofshmttenn nancing available to a rm. \\i'en,r often the credit terms altered with trade credit involve a cash discount for early.r payment For example, a supplier might offer terms of 24"10, net 30, which means that a 2 percent discount is offered if payment is made within 10 days or the full amount is due in 30 days. Thus, a 2 percent penalty is involved for not paying within 10 days, or for delaying payment from the tenth to the tirtierth clayl [that is, 2!} days}. You can use the basic APR equation to estimate the cost of shortterm credit: interest interest 1 APR: , _ _ or _ _ X. pnnc1pal thme pnnCIpal time Using a $1 invoice amount, the effective cost of passing up the discount pen'od using the preceding credit terms can be calculated as follows: $0.02 x 1 $0.98 2|] 1' 350 APR = Note that the 2 percent cash discount is the interest cost of extending the payment period an eddionai 20 (30 10) days. Note aha that the principal amount of the credit is $0.98. This amount constitutes the full pn'ncipal amount as of the tenth dag.r of the credit period, after which time the cash discount is lost. mi 0 is 43.35 98. {Round to two decimal places.) CheckAnswer i { Bonus Question 15-1 (static) Which of the following is an advantage associated with the use of current versus longterm liabilities? {Select the best choice below.) CI A. The interest cost of current liabilities is generally higher than long-term debL Ci B. The rm's interest costs can vary horn year to yea r. C} C. The use of current liabilities subjects the rm to greater risk of illiquidity. @I D. All ofthe above. 0 E. None-ofthe above. 3 Sorry. that's not correct. Please try again. := QUE Spontaneous nancing consists et (Seleci'fhe best choice below.) 0 A. accounts payable. 0 B. trade credit. (:3 C1 shorttenn notes payable. IE) D; All ofthe above. C) E. A and B only. 3 Sorry, that's not correct. X Spontaneous sources 01 nancing include all those sources thai are available upon demand or that arise naturally as a part of doing business. {Effective annual rate] Compute the cost of the following trade credit terms using the compounding formula, or eectjve annual rate. Note: Assume a 30day menth and EBBday year. a.2f1[i, net 30 b. 3915, net 30 c.34'15, net 45 d. 2F15,net6[3 a. When payment is made on the net due date, the APR of the credit ten'ns of 21'1 0, net 3|] is BET-33%. (Round to two decimai places.) The EAR of the credit terms of 2m], net 30 is D'i. (Round to two decimal places]