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Unformatted text preview: 8-10)McGriff Dog Food Company normally takes 20 days to pay for average daily credit purchases of $9,000. Its average daily sales are $10,000, and it collects accounts in 25 days.a.What is its net credit position? That is, compute its accounts receivable and accounts payable and subtract the latter from the former.Accounts receivable = Average daily credit sales * Average collection periodAccounts payable = Average daily credit purchases * Average payment periodb.If the firm extends its average payment period from 20 days to 32 days (and all else remains the same), what is the firm's new net credit position? Has it improved its cash flow?Solution:McGriff Dog Food Companya. Net credit position = Accounts Receivable – Accounts payableAccounts receivable = average daily * average collectioncredit salesperiod$10,000 * 25 = $250,000Accounts payable = average daily * average paymentcredit purchases periodPayment Period = $9,000 * 20 = $180,000Net Credit Position = $250,000 – $180,000 = $70,000b. Accounts Receivable will remain at $250,000Accounts Payable = $9,000 * 32 = 288,000Net Credit Position($ 38,000)The firm has improved its cash flow position. Instead of extending $70,000 more in credit (funds) than it is receiving, it has reversed the position and is the net recipient of $38,000 in credit.8-16.Your company plans to borrow $5 million for 12 months, and your banker gives you a stated rate of 14 percent interest. You would like to know the effective rate of interest for the following types of loans. (Each of the following parts stands alone.)a.Simple 14 percent interest with a 10 percent compensating balance.Simple 14 percent interest with a 10 percent compensating balance....
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- Spring '11
- Interest, Plant and Equipment, southwest bank, net credit position