Sources of Short-term Financing Problems

# Sources of Short-term Financing Problems - CASH D ISCOUNT...

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Unformatted text preview: CASH D ISCOUNT 1. Compute the cost of not taking the following cash discounts. Cost of not taking = Discount % x 360 . a cash discount 100% - Disc. % Final due date – Discount period a. 2/10, net 40 Cost of not taking a cash discount = (2% / 100% - 2%) x (360 / 40 -10) Cost of not taking a cash discount = 2.04% x 12 Cost of not taking a cash discount = 24.48% b. 2/15, net 30 Cost of not taking a cash discount = (2% / 100% - 2%) x (360 / 30 -15) Cost of not taking a cash discount = 2.04% x 24 Cost of not taking a cash discount = 48.96% c. 2/10, net 45 Cost of not taking a cash discount = (2% / 100% - 2%) x (360 / 45 -10) Cost of not taking a cash discount = 2.04% x 10.29 Cost of not taking a cash discount = 20.99% d. 3/10, net 90 Cost of not taking a cash discount = (3% / 100% - 3%) x (360 / 90 -10) Cost of not taking a cash discount = 3.09% x 4.50 Cost of not taking a cash discount = 13.91% 2. Delilah’s Haircuts can borrow from its bank at 13 percent to take a cash discount. The terms of the cash discount are 2/15, net 55. Should the firm borrow the funds? Cost of not taking = Discount % x 360 . a cash discount 100% - Disc. % Final due date – Discount period Cost of not taking a cash discount = (2% / 100% - 2%) x (360 / 55 – 15) Cost of not taking a cash discount = 2.04% x 9 Cost of not taking a cash discount = 18.36% The cost of not taking the cash discount is greater than the cost of the loan (18.36% vs. 13%). The firm should borrow the money and take the cash discount. EFFECT IVE RATE OF I N TEREST 1. Your bank will lend you \$4,000 for 45 days at a cost of \$50 interest. What is your effective rate of interest? Effective rate = I nterest x Days in the year (360) Principal Days loan is outstanding Effective rate = (\$50 / \$4,000) x (360 / 45) Effective rate = 1.25% x 8 Effective rate = 10% 2. Your bank will lend you \$3,000 for 50 days at a cost of \$45 interest. What is your effective rate of interest? Effective rate = I nterest x Days in the year (360) Principal Days loan is outstanding Effective rate = (\$45 / \$3,000) x (360 / 50) Effective rate = 1.5% x 7.2 Effective rate = 10.80% 3. I.M. Boring borrows \$5,000 for one year at 13 percent interest. What is the effective rate of interest if the loan is discounted? Effective rate = Interest x Days in the year (360) on a discount loan Principal - I nterest Days loan is outstanding Effective rate on a discount loan = (\$650 / \$5,000 - \$650) x (360 / 360) Effective rate on a discount loan = (\$650 / \$4,350) x 1 Effective rate on a discount loan = 14.94% 4. Ida Kline borrows \$8,000 for 90 days and pays \$180 interest. What is the effective rate of interest if the loan is discounted? Effective rate = Interest x Days in the year (360) on a discount loan Principal - I nterest Days loan is outstanding Effective rate on a discount loan = (\$180 / \$8,000 - \$180) x (360 / 90) Effective rate on a discount loan = (\$180 / \$7,820) x 4 Effective rate on a discount loan = 2.30% x 4 Effective rate on a discount loan...
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## This note was uploaded on 09/13/2011 for the course ACCOUNTING 111 taught by Professor Berney during the Spring '11 term at Ashford University.

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Sources of Short-term Financing Problems - CASH D ISCOUNT...

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