Unformatted text preview: wed. The prime rate is currently 8%. Both agreements have $4 million borrowing limits. The firm expects
on average to borrow $2 million during the year no matter which loan agreement
it decides to use. 662 PART 5 Short-Term Financial Decisions a. What is the effective annual rate under the line of credit?
b. What is the effective annual rate under the revolving credit agreement?
(Hint: Compute the ratio of the dollars that the firm will pay in interest and
commitment fees to the dollars that the firm will effectively have use of.)
c. If the firm does expect to borrow an average of half the amount available,
which arrangement would you recommend for the borrower? Explain why.
LG4 15–13 Cost of commercial paper Commercial paper is usually sold at a discount. Fan
Corporation has just sold an issue of 90-day commercial paper with a face value
of $1 million. The firm has received initial proceeds of $978,000.
a. What effective annual rate will the firm pay for financing with commercial
paper, assuming that it is rolled over every 90 days throughout the year?
b. If a brokerage fee of $9,612 was paid from the initial proceeds to an
investment banker for selling the issue, what effective annual rate will the
firm pay, assuming that the paper is rolled over every 90 days throughout
the year? LG5 15–14 Accounts receivable as collateral Kansas City Castings (KCC) is attempting to
obtain the maximum loan possible using accounts receivable as collateral. The
firm extends net-30-day credit. The amounts that are owed KCC by its 12 credit
customers, the average age of each account, and customer’s average payment
period are as shown in the following table. Customer Account
receivable Average age
of account Average payment
period of customer A $37,000 40 days 30 days B 42,000 25 50 C 15,000 40 60 D 8,000 30 35 E 50,000 31 40 F 12,000 28 30 G 24,000 30 70 H 46,000 29 40 I 3,000 30 65 J 22,000 25 35 K 62,000 35 40 L 80,000 60 70 a. If the bank will accept all accounts that can be collected in 45 days or less as
long as the cu...
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