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Unformatted text preview: ective cost of the bank loan? Based on these costs, what should Malone do?
d. Assume that Malone forgoes the discount and borrows the amount needed to
become current on its payables. Construct a pro forma balance sheet based on
this decision. (Hint: You will need to include an account called “prepaid interest” under current assets.)
e. Now assume that the $500,000 shown on the balance sheet is recorded net of
discounts. How much would Malone have to pay its suppliers to reduce its
accounts payables to $250,000? If Malone’s tax rate is 40 percent, what is the
effect on its net income due to the lost discount when it reduces its accounts
payable to $250,000? How much would Malone have to borrow? (Hint: Malone will receive a tax deduction due to the lost discount, which will affect the
amount it must borrow.) If Malone’s tax rate is 40 percent, what is the effect
on its net income due to the lost discount when it reduces its accounts payable
to $250,000? Construct a pro forma balance sheet based on this scenario.
(Hint: You will need to include an account called “prepaid interest” under
current assets and adjust retained earnings by the after-tax amount of the lost
(27-11) Suncoast Boats Inc. estimates that because of the seasonal nature of its business, it
Alternative Financing will require an additional $2 million of cash for the month of July. Suncoast Boats
Arrangements has the following 4 options available for raising the needed funds:
(1) Establish a 1-year line of credit for $2 million with a commercial bank.
The commitment fee will be 0.5 percent per year on the unused portion,
and the interest charge on the used funds will be 11 percent per annum.
Assume that the funds are needed only in July and that there are 30 days
in July and 360 days in the year.
(2) Forgo the trade discount of 2/10, net 40, on $2 million of purchases during July.
(3) Issue $2 million of 30-day commercial paper at a 9.5 percent per annum
interest rate. The total transaction fee, including the cost of a backup
credit line, on using commercial paper is 0.5 percent of the amount of the
issue. 27-28 Chapter 27 Providing and Obtaining Credit (4) Issue $2 million of 60-day commercial paper at a 9 percent per annum
interest rate, plus a transaction fee of 0.5 percent. Since the funds are
required for only 30 days, the excess funds ($2 million) can be invested in
9.4 percent per annum marketable securities for the month of August.
The total transactions cost of purchasing and selling the marketable securities is 0.4 percent of the amount of the issue.
a. What is the dollar cost of each financing arrangement?
b. Is the source with the lowest expected cost necessarily the one to select? Why
or why not? Spreadsheet Problem
(27-12) Start with the partial model in the file FM11 Ch 27 P12 Build a Model.xls from
the textbook’s Web site. Rework parts a through d of Problem 27-10 using a
spreadsheet model. Then answer the following related question.
e. Do a sensitivity analysis that shows how the size of the bank loan would vary
with changes in the interest rate and the compensating balance percentage,
using interest rates in the range of 5 to 25 percent and compensating balances
in the range of 0 to 30 percent. Build a Model: Short-Term
Financing Analysis FM
Please go to our Web site, http://brigham.swlearning.com, to access any
Cyberproblems. Please go to http://brighamxtra.swlearning.com to access any Thomson ONE
problems. Mini Case FM
See FM11 Ch 27
Show.ppt and FM11
Ch 27 Mini Case.xls. Rich Jackson, a recent finance graduate, is planning to go into the wholesale building supply business
with his brother, Jim, who majored in building construction. The firm would sell primarily to general
contractors, and it would start operating next January. Sales would be slow during the cold months, rise
during the spring, and then fall off again in the summer, when new construction in the area slows. Sales
estimates for the first 6 months are as follows (in thousands of dollars):
January $100 February 200 March
April $300 May $200 300 June 100 The terms of sale are net 30, but because of special incentives, the brothers expect 30 percent of the
customers (by dollar value) to pay on the 10th day following the sale, 50 percent to pay on the 40th
day, and the remaining 20 percent to pay on the 70th day. No bad debt losses are expected, because Jim,
the building construction expert, knows which contractors are having financial problems.
a. Discuss, in general, what it means for the brothers to set a credit and collections policy.
b. Assume that, on average, the brothers expect annual sales of 18,000 items at an average price of
$100 per item. (Use a 365-day year.)
(1) What is the firm’s expected days sales outstanding (DSO)? (2) What is its expected average daily sales (ADS)? (3) What is its expected average accounts receivable level? Mini Case 27-29 (4) Assume that the firm’s profit margin is 25 percent. How much of th...
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