Randall corporation plans to borrow

Corporate Finance Connect Homework

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Problem 8-1 Cash discount [LO1]

Compute the cost of not taking the following cash discounts.

(a)

2/18, net 40. (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places . Omit the "%" sign in your response.)

Cost of lost discount

%

(b)

2/18, net 65. (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the "%" sign in your response.)

Cost of lost discount

%

(c)

3/11, net 50. (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the "%" sign in your response.)

Cost of lost discount

%

(d)

4/19, net 120. (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the "%" sign in your response.)

Cost of lost discount

%

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2.

value: 1.00 points

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Problem 8-2 Cash discount decision [LO1]

Regis Clothiers can borrow from its bank at 15 percent to take a cash discount. The terms of the cash discount are 2/16, net 90.

(a)

Compute the cost of not taking the cash discount. (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the "%" sign in your response.)

Cost of not taking a cash discount

%

(b)

Should the firm borrow the funds?

No

Yes

3.

value: 1.00 points

Problem 8-5 Effective rate of interest [LO2]

A pawn shop will lend $158 for 12 days at a cost of $12 interest.

What is the effective rate of interest? (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the "%" sign in your response.)

Effective rate

%

4.

value: 1.00 points

Problem 8-7 Effective rate on discounted loan [LO2]

Mary Ott is going to borrow $6,900 for 60 days and pay $223 interest.

What is the effective rate of interest if the loan is discounted? (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the "%" sign in your response.)

Effective rate on discounted loan

%

5.

value: 1.00 points

Problem 8-8 Prime vs. LIBOR [LO2]

Dr. Ruth is going to borrow $7,200 to help write a book. The loan is for one year and the money can either be borrowed at the prime rate or the LIBOR rate. Assume the prime rate is 12 percent and LIBOR 2.5 percent less. Also assume there will be a $45 transaction fee with LIBOR (this amount must be added to the interest cost with LIBOR).

Which loan has the lower effective interest cost? (Use 360 days in a year.)

Prime

LIBOR

6.

value: 1.00 points

Problem 8-9 Foreign borrowing [LO2]

Gulliver Travel Agencies thinks interest rates in Europe are low. The firm borrows euros at 9 percent for one year. During this time period the dollar falls 12 percent against the euro.

What is the effective interest rate on the loan for one year? (Omit the "%" sign in your response.)

Effective interest rate

%

7.

value: 1.00 points

Problem 8-10 Dollar cost of a loan [LO2]

Talmud Book Company borrows $21,500 for 30 days at 15 percent interest.

What is the dollar cost of the loan? (Use 360 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Cost of loan

$

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8.

value: 2.00 points

Problem 8-11 Net credit position [LO1]

McGriff Dog Food Company normally takes 20 days to pay for average daily credit purchases of $9,520. Its average daily sales are $10,530, and it collects accounts in 25 days.

(a)

What is its net credit position? (Omit the "$" sign in your response.)

Net credit position

$

(b-1)

If the firm extends its average payment period from 20 days to 34 days (and all else remains the same), what is the firm's new net credit position? (Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

Net credit position

$

(b-2)

Has it improved its cash flow?

No

Yes

9.

value: 1.00 points

Problem 8-13 Compensating balances [LO2]

Computer Graphics Company needs $314,760 in funds for a project.

(a)

With a compensating balance requirement of 14 percent, how much will the firm need to borrow? (Omit the "$" sign in your response.)

Amount to be borrowed

$

(b)

Given your answer to part a and a stated interest rate of 18 percent on the total amount borrowed, what is the effective rate on the $314,760 actually being used? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Effective rate

%

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10.

value: 1.00 points

Problem 8-14 Compensating balances and installment loans [LO2]

The Dade Company is borrowing $351,000 for one year and paying $35,400 in interest to Miami National Bank. The bank requires a 27 percent compensating balance. The principal refers to funds the firm can effectively utilize (Amount borrowed − Compensating balance).

(a)

What is the effective rate of interest? (Use 360 days in a year. Omit the "%" sign in your response.)

Effective rate

%

(b)

What would be the effective rate if the company were required to make 12 monthly payments to retire the loan? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Effective rate

%

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11.

value: 1.00 points

Problem 8-15 Compensating balances with idle cash balances [LO2]

Randall Corporation plans to borrow $285,000 for one year at 20 percent from the Waco State Bank. There is a 22 percent compensating balance requirement. Randall Corporation keeps minimum transaction balances of $14,000 in the normal course of business. This idle cash counts toward meeting the compensating balance requirement.

What is the effective rate of interest? (Use 360 days in a year. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Effective rate

%

12.

value: 2.00 points

Problem 8-17 Effective rate under different terms [LO2]

Your company plans to borrow $10 million for 12 months, and your banker gives you a stated rate of 14 percent interest.

Calculate the effective rate of interest for the following types of loans.

(a)

Simple 14 percent interest with a 18 percent compensating balance. (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Effective rate

%

(b)

Discounted interest. (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Effective rate

%

(c)

An installment loan (12 payments). (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Effective rate

%

(d)

Discounted interest with a 9 percent compensating balance. (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Effective rate

%

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13.

value: 1.00 points

Problem 8-18 Effective rate under different terms [LO2]

If you borrow $5,300 at $400 interest for one year, what is your effective interest rate for the following payment plans? (Round your answers to 2 decimal places. Omit the "%" sign in your response.)

Effective rate

(a) Annual payment

%

(b) Semiannual payments

%

(c) Quarterly payments

%

(d) Monthly payments

%

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14.

value: 1.00 points

Problem 8-20 Installment loan for multiyears [LO2]

Lewis and Clark Camping Supplies Inc. is borrowing $82,000 from Western State Bank. The total interest is $15,000. The loan will be paid by making equal monthly payments for the next three years.

What is the effective rate of interest on this installment loan? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Effective rate

%

15.

value: 1.00 points

Problem 8-21 Cash discount under special circumstance [LO2]

Mr. Hugh Warner is a very cautious businessman. His supplier offers trade credit terms of 3/17, net 95. Mr. Warner never takes the discount offered, but he pays his suppliers in 85 days rather than the 95 days allowed so he is sure the payments are never late.

What is Mr. Warner's cost of not taking the cash discount? (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the "%" sign in your response.)

Cost of not taking a cash discount

%

16.

value: 2.00 points

Problem 8-23 Bank loan to take cash discount [LO1, 2]

The Reynolds Corporation buys from its suppliers on terms of 2/19, net 50. Reynolds has not been utilizing the discounts offered and has been taking 50 days to pay its bills.

Mr. Duke, Reynolds Corporation vice president, has suggested that the company begin to take the discounts offered. Duke proposes that the company borrow from its bank at a stated rate of 17 percent. The bank requires a 12 percent compensating balance on these loans. Current account balances would not be available to meet any of this compensating balance requirement.

(a)

Calculate the cost of not taking a cash discount. (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the "%" sign in your response.)

Cost of not taking a cash discount

%

(b)

Calculate the Effective rate of interest if the company borrow from the bank. (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the "%" sign in your response.)

Effective rate

%

(c)

Do you agree with Duke's proposal?

Yes

No

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17.

value: 2.00 points

Problem 8-24 Bank loan to take cash discount [LO1, 2]

Neveready Flashlights, Inc., needs $304,000 to take a cash discount of 2/19, net 74. A banker will loan the money for 55 days at an interest cost of $12,400.

(a)

What is the effective rate on the bank loan? (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the "%" sign in your response.)

Effective rate

%

(b)

How much would it cost (in percentage terms) if the firm did not take the cash discount, but paid the bill in 74 days instead of 19 days? (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the "%" sign in your response.)

Cost of not taking a cash discount

%

(c)

Should the firm borrow the money to take the discount?

Yes

No

(d)

If the banker requires a 20 percent compensating balance, how much must the firm borrow to end up with the $304,000? (Omit the "$" sign in your response.)

Amount to be borrowed

$

(e-1)

What would be the effective interest rate in part d if the interest charge for 55 days were $9,500? (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the "%" sign in your response.)

Effective rate

%

(e-2)

Should the firm borrow with the 20 percent compensating balance? (The firm has no funds to count against the compensating balance requirement.)

No

Yes

18.

value: 2.00 points

Problem 8-26 Competing terms from banks [LO2]

Summit Record Company is negotiating with two banks for a $185,000 loan. Fidelity Bank requires a 20 percent compensating balance, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a 10 percent compensating balance, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 13 percent.

(a-1)

Calculate the effective interest rate for Fidelity Bank and Southwest Bank. (Round your answers to 2 decimal places. Omit the "%" sign in your response.)

Effective rate

Fidelity Bank

%

Southwest Bank

%

(a-2)

Which loan should Summit accept?

Southwest Bank

Fidelity Bank

(b)

Recompute the effective cost of interest, assuming that Summit ordinarily maintains $37,000 at each bank in deposits that will serve as compensating balances. (Round your answers to 2 decimal places. Omit the "%" sign in your response.)

Effective rate

Fidelity Bank

%

Southwest Bank

%

(c)

Does your choice of banks change if the assumption in part b is correct?

Yes

No

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19.

value: 2.00 points

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Problem 8-27 Accounts receivable financing [LO1]

Charmin Paper Company sells to the 12 accounts listed below.

Account

Receivable balance outstanding

Average age of the account over the last year

A

$

63,100

27

B

219,000

43

C

77,100

14

D

26,300

58

E

56,800

43

F

243,000

34

G

36,200

25

H

315,000

67

I

44,600

33

J

98,300

50

K

235,000

16

L

69,600

35

Capital Financial Corporation will lend 90 percent against account balances that have averaged 30 days or less; 80 percent for account balances between 31 and 40 days; and 70 percent for account balances between 41 and 45 days. Customers that take over 45 days to pay their bills are not considered acceptable accounts for a loan.

The current prime rate is 13.50 percent, and Capital charges 4.50 percent over prime to Charmin as its annual loan rate.

(a)

Determine the maximum loan for which Charmin Paper Company could qualify. (Omit the "$" sign in your response.)

Maximum loan amount

$

(b)

Determine how much one month’s interest expense would be on the loan balance determined in part a.(Round your final answer to 2 decimal places. Omit the "$" sign in your response.)

Interest expense

$

rev: 10_26_2012

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20.

value: 2.00 points

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Problem 8-28 Hedging to offset risk [LO5]

The treasurer for Pittsburgh Iron Works wishes to use financial futures to hedge her interest rate exposure. She will sell five Treasury futures contracts at $118,000 per contract. It is July and the contracts must be closed out in December of this year. Long-term interest rates are currently 10.30 percent. If they increase to 12.50 percent, assume the value of the contracts will go down by 10 percent. Also if interest rates do increase by 2.20 percent, assume the firm will have additional interest expense on its business loans and other commitments of $72,000. This expense, of course, will be separate from the futures contracts.

(a)

What will be the profit or loss on the futures contract if interest rates go to 12.50 percent by December when the contract is closed out? (Input the amount as positive value. Omit the "$" sign in your response.)

on futures contracts

$

(c-1)

After considering the hedging, what is the net cost to the firm of the increased interest expense of $72,000? (Omit the "$" sign in your response.)

Net cost

$

(c-2)

What percent of this $72,000 cost did the treasurer effectively hedge away? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Percentage hedged away

%

(d)

Indicate whether there would be a profit or loss on the futures contracts if interest rates went down.

Loss

Profit