Ch27 P12 Build a Model - A 1 2 3 4 5 6 7 8 9 10 11 12 13 14...

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1 of 1 4/19/2010 Chapter 27. Ch 27-12 Build a Model Cash $50 Accounts payable $500 Accounts Receivable 450 Notes payable 50 Inventory 750 Accruals 50 Current Assets 1,250 Current liabilities 600 Fixed assets 750 Long-term debt 150 Common equity 1,250 Total assets $2,000 Total liabilities and equity $2,000 a. How large would the accounts payable balance be if Malone takes discounts? If it does not take discounts and pays in 30 days? Input Data Discount, if taken 1% Days Malone has taken to make payment 60 Term of discount (days) 10 Interest rate on bank loan 15% Payment due (days) 30 Required compensating balance 20% Accounting days/year 360 Purchases per day = Old A/P / old days until payment = / = Accounts payables = x Accounts payables if take discounts = x = Accounts payables if don't take discounts = x = b. How large must the bank loan be if Malone takes discounts? If Malone doesn't take discounts? The company must go from $500 to either $83.33 or $250, so it will need this amount of cash: Cash needed if take discounts: Cash needed if don't take discounts: Amount needed = Loan - (Interest rate on loan)(Loan) - (Compensating balance)(Loan) Loan = Amount needed/(1- Interest rate - Comp. Balance %) Loan if take discounts: Loan if don't take discounts: c. What are the nominal and effective costs of nonfree trade credit? What is the effective cost of the bank loan? Based on these costs, what should Malone do? (1) Cost of nonfree trade credit
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This note was uploaded on 10/22/2011 for the course ACCOUNTING 1102 taught by Professor Borges during the Spring '11 term at InterAmerican Recinto Metropolitano.

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