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**Unformatted text preview: **truct an aging schedule as of June 30. Use account ages of 0–30, 31–60,
and 61–90 days.
d. Construct the uncollected balances schedule for the second quarter as of
June 30.
(27-4) On March 1, Minnerly Motors obtained a business loan from a local bank. The
loan is a $25,000 interest-only loan with a nominal rate of 11 percent. Interest is
calculated on a simple interest basis with a 365-day year. What is Minnerly’s interest charge for the first month (assuming 31 days in the month)? Cost of Bank Loan (27-5) Mary Jones recently obtained an equipment loan from a local bank. The loan is
for $15,000 with a nominal interest rate of 11 percent. However, this is an installment loan, so the bank also charges add-on interest. Mary must make monthly
payments on the loan, and the loan is to be repaid in 1 year. What is the effective
annual rate on the loan (assuming a 365-day year)? Cost of Bank Loan (27-6) Del Hawley, owner of Hawley’s Hardware, is negotiating with First City Bank for
a 1-year loan of $50,000. First City has offered Hawley the following alternatives.
Calculate the effective annual interest rate for each alternative. Which alternative
has the lowest effective annual interest rate?
a. A 12 percent annual rate on a simple interest loan, with no compensating balance required and interest due at the end of the year.
b. A 9 percent annual rate on a simple interest loan, with a 20 percent compensating balance required and interest due at the end of the year.
c. An 8.75 percent annual rate on a discounted loan, with a 15 percent compensating balance.
d. Interest is figured as 8 percent of the $50,000 amount, payable at the end of
the year, but the $50,000 is repayable in monthly installments during the year. Cost of Bank Loans (27-7) The D. J. Masson Corporation needs to raise $500,000 for 1 year to supply working capital to a new store. Masson buys from its suppliers on terms of 3/10, net
90, and it currently pays on the 10th day and takes discounts, but it could forgo
discounts, pay on the 90th day, and get the needed $500,000 in the form of costly
trade credit. Alternatively, Masson could borrow from its bank on a 12 percent
discount interest rate basis. What is the effective annual interest rate of the lower
cost source? Effective Cost of
Short-Term Credit (27-8) Yonge Corporation must arrange financing for its working capital requirements
for the coming year. Yonge can (a) borrow from its bank on a simple interest basis
(interest payable at the end of the loan) for 1 year at a 12 percent nominal rate;
(b) borrow on a 3-month, but renewable, loan basis at an 11.5 percent nominal
rate; (c) borrow on an installment loan basis at a 6 percent add-on rate with 12
end-of-month payments; or (d) obtain the needed funds by no longer taking discounts and thus increasing its accounts payable. Yonge buys on terms of 1/15, net
60. What is the effective annual cost (not the nominal cost) of the least expensive
type of credit, assuming 360 days per year? Effective Cost of
Short-Term Credit (27-9) Gifts Galore Inc. borrowed $1.5 million from National City Bank. The loan was
made at a simple annual interest rate of 9 percent a year for 3 months. A 20 percent compensating balance requirement raised the effective interest rate.
a. The nominal annual rate on the loan was 11.25 percent. What is the true
effective rate?
b. What would be the effective cost of the loan if the note required discount
interest?
c. What would be the nominal annual interest rate on the loan if the bank did
not require a compensating balance but required repayment in 3 equal
monthly installments? Cost of Bank Loans Problems 27-27 (27-10) Malone Feed and Supply Company buys on terms of 1/10, net 30, but it has not
been taking discounts and has actually been paying in 60 rather than 30 days.
Assume that the accounts payable are recorded at full cost, not net of discounts.
Malone’s balance sheet follows (thousands of dollars): Short-Term Financing
Analysis Cash $ 50 Accounts payable $ 500 Accounts receivable 450 Notes payable 50 Inventory 750 Accruals 50 Current assets $1,250 Current liabilities $ 600 Long-term debt
Fixed assets 750 Total assets $2,000 150 Common equity 1,250 Total liabilities and equity $2,000 Now, Malone’s suppliers are threatening to stop shipments unless the company
begins making prompt payments (that is, paying in 30 days or less). The firm can
borrow on a 1-year note (call this a current liability) from its bank at a rate of
15 percent, discount interest, with a 20 percent compensating balance required.
(Malone’s $50,000 of cash is needed for transactions; it cannot be used as part of
the compensating balance.)
a. How large would the accounts payable balance be if Malone takes discounts?
If it does not take discounts and pays in 30 days?
b. How large must the bank loan be if Malone takes discounts? If Malone doesn’t
take discounts?
c. What are the nominal and effective costs of nonfree trade credit? What is the
eff...

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