41 430 531 630 balance 2 mil 4 mil 3 mil 4 mil 2 mths

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4/1 4/30 5/31 6/30 Balance $2 mil. $4 mil. ($3 mil.) $4 mil. 2 mths. unused credit line 2 x ($5,000,000 x .0025) $25,000 1 mth. $3 mil. borrowed $3,000,000 x (.09 ÷ 12) 22,500 1 mth. $2 mil. unused $2,000,000 x .0025 5,000 $52,500 140. Correct answer d. Ideally, permanent assets are financed with long-term debt of matching maturities. The greater the portion of assets financed by short-term debt, the greater the risk that the firm will not be able to meet these obligations. 141. Correct answer a. Texas Corporation should purchase the 90-day investment as it has the highest annual yield as shown below. 90-day: $80,000 x .95 = $76,000; ($80,000 - $76,000) ÷ $76,000 = .05 x 4 = 20% 180-day: $75,000 x .94 = $70,500; ($75,000 - $70,500) ÷ $70,500 = .06 x 2 = 12% 270-day: $100,000 x .95= $95,000; $5,000 ÷ $95,000 = (.05 ÷ 3) x 4 = 7% 360-day: $60,000 x .90 = $54,000; $6,000 ÷ $54,000 = .11 x 1 = 11% 142. Correct answer d. The firm should seek an unsecured short-term loan to finance additional capital needs during the busy season. A transaction loan is generally for one specific purpose like completing a specific contract while term and installment loans are generally one year or greater. 143. Correct answer d. A commercial bank would likely be able to provide its customers with all of these financing vehicles.
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295 144. Correct answer b. Cost of commercial paper financing: $12,000,000 x 3/12 x 7% = $210,000 expense July investment: $4,000,000 x 4% / 12 = $13,333 income. No investment in August September: $2,000,000 x 4% / 12 = $6,667 income. Net cost: $210,000 - $13,333 - $6.667 = $190,000 Line of credit financing: July $8,000,000 x 8% / 12 = $53,333 Aug 12,000,000 x 8% / 12 = 80,000 Sep 10,000,000 x 8.5% / 12 = 78,833 Total $204,166 $204,166 - $190,000 = $14,166 advantage to commercial paper 145. Correct answer b. The cost of foregoing the trade discount is 18.4% as shown below. Trade discount = (.02 ÷ .98) x (360 ÷ 40) = 18.4% 146. Correct answer d. The effective annual interest rate cost is 13.9% as shown below. Effective interest rate = (.03 ÷ .97) x (360 ÷ 80) = 13.9% 147. Correct answer d. The effective interest rate to the borrower is 13.64% as shown below. Effective interest rate = .12 ÷ (1 - .12) = 13.64% 148. Correct answer d. The face value of the note should be $329,670 as shown below. Effective interest rate = .09 ÷ .91 = .0989 Face value of note = $300,000 x 1.0989 = $329,670 149. Correct answer c. Keller would need to borrow $176,471 as shown below. Interest rate = ($150,000 x .08) ÷ [$150,000 – ($150,000 x .15)] = $12,000 ÷ $127,500 = .0943875 Funds required = $150,000 + [($150,000 x .15) ÷ 2] = $161,250 x 1.0943875 = $176,471
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296 150. Correct answer b. The compensating balance required is $3,000,000 as shown below. Effective interest rate = ($100,000,000 x .10) ÷ X = 10.31 X = $97,000,000 Compensating balance = $100,000,000 - $97,000,000 = $3,000,000 151. Correct answer c. The effective interest rate is 8.75% as shown below. Effective interest rate = ($100,000 x .07) ÷ [$100,000 – ($100,000 x .20)] = $7,000 ÷ $80,000 = 8.75% 152. Correct answer b. The compensating balance required is $2,440,000 as shown below. Effective interest rate = ($100,000,000 x .10) ÷ X = 10.25 X = $97,560,000 Compensating balance = $100,000,000 - $97,560,000 = $2,440,000 153. Correct answer b. Frame will pay $1,131,250 as shown below. Interest = ($10,000,000 x .02) + ($20,000,000 x .04) + ($5,000,000 x .02) = $1,100,000 Fees = [$10,000,000 x (.005 ÷ 12 x 3)] + [$15,000,000 x (.005 ÷ 12 x 3)] = $31,250 Total = $1,100,000 + $31,250 = $1,131,250 154. Correct answer c. The effective interest rate is 8.42% as shown below. Effective interest rate = ($100,000,000 x .08) ÷ ($100,000,000 - $5,000,000) = $8,000 ÷ $95,000,000 = 8.42% 155. Correct answer d. The residual theory of dividends treats dividends as strictly a financing decision with the payment of cash dividends determined solely by the availability of acceptable investment proposals.
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