Short Term Financing Solutions 1

# Short Term Financing Solutions 1 - \$973.97 How many...

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Old Exam Questions - Short-term Financing - Solutions Page 1 of 2 Pages Short-Term Financing - Solutions 1. A firm is offered trade credit terms of 3/15, net 45. The firm does not take the discount, and it pays after 67 days. What is the effective annual cost (on an EAR basis) of not taking this discount? A. 21.41% B. 22.07% C. 22.95% * D. 23.48% E. 24.52% Effective cost = (1 + 3%/97%) 360/52 - 1.0 = 23.48% 2. Your company is determining whether to support \$100,000 of its permanent current assets with a bank note or a short-term bond. The firm's bank offers a two-year note where the firm will receive \$100,000 and repay \$118,810 at the end of two years. The firm has the option to renew the loan at market rates. Alternatively, your company can sell 8.5 percent coupon bonds with a 2-year maturity and \$1,000 par value at a price of
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Unformatted text preview: \$973.97. How many percentage points lower is the interest rate on the less expensive debt instrument? A. 0.0%; the rates are equal. B. 1.2% * C. 1.0% D. 1.8% E 0.6% Note that the cash flows viewed from the firm's perspective involve inflows at time 0, and repayment of coupon and/or maturity value in the future. Banknote: N = 2; PV = 100,000; PMT = 0; FV = -118,810, Solve for I = 9.0%. Bond: N = 2; PV = -973.97; PMT = 85; FV = 1,000, Solve for I = 10.0%. The difference is 10.0% - 9.0% = 1.0% 3. Your firm buys on credit terms of 2/10, net 45, and it always pays on Day 45. If you calculate that this policy effectively costs your firm \$157,500 each year, what is the firm's average accounts payable balance? A. \$1,234,000 B. \$ 75,000 C. \$ 157,500 D. \$ 625,000 * E. \$ 750,000...
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