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Chapter 3: 10BP (page 250)
Talmud Book Company borrows $24,900 for 60 days at 12 percent interest. What is the dollar cost of the loan?
Dollar cost of loan = Amount borrowed X Interest rate X Days loan is outstanding/ Days in a year (360)
The dollar cost of the loan is $498.
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Digital Access Inc. needs \(400,000 in funds for a project.
b. Given your answer to part a and a stated interest rate of 9 percent on the total amount borrowed, what is the effective rate on the \)400,000 actually being used?
Charming Paper Company sells to the 12 accounts listed here:
Account | Receivable balance outstanding | Average age of account over the last year |
A | \(60,800 | 22 |
B | \)168,000 | 43 |
C | \(78,300 | 19 |
D | \)24,300 | 55 |
E | \(58,900 | 42 |
F | \)238,000 | 39 |
G | \(30,400 | 16 |
H | \)374,000 | 72 |
I | \(41,400 | 32 |
J | \)96,500 | 58 |
K | \(292,000 | 17 |
L | \)67,700 | 37 |
Capital Financial Corporation will lend 90 percent against account balances that have averaged 30 days or less; 80 percent for account balances between 31 and 40 days; and 70 percent for account balances between 41 and 45 days. Customers that take over 45 days to pay their bills are not considered acceptable accounts for a loan.
The current prime rate is 15.5 percent, and Capital charges 4.5 percent over prime to Charming as its annual loan rate.
a. Determine the maximum loan for which Charming Paper Company could qualify.
Sharpe Knife Company expects sales next year to be \(1,550,000 if the economy is strong, \)825,000 if the economy is steady, and $550,000 if the economy is weak. Mr. Sharpe believes there is a 30 percent probability the economy will be strong, a 40 percent probability of a steady economy, and a 30 percent probability of a weak economy. What is the expected level of sales for the next year?
Maxim Air Filters Inc. plans to borrow $300,000 for one year. Northeast National Bank will lend the money at 10 percent interest and requires a compensating of 20 percent. What is the effective rate of interest?
Explain how rapidly expanding sales can drain the cash resources of a firm.
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