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Chapter 3: 11DQ (page 247)
Briefly discuss three types of lender control used in inventory financing.
The three types of lender controls are blanket inventory, trust receipt and warehousing.
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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)
What does the EOQ formula tell us? What assumption is made about the usage rate for inventory?
Assume that Hogan Surgical Instruments Co. has \(2,500,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 18 percent, but with a high-liquidity plan, the return will be 14 percent. If the firm goes with a short-term financing plan, the financing costs on the \)2,500,000 will be 10 percent, and with a long-term financing plan, the financing costs on the $2,500,000 will be 12 percent. (Review Table 6-11 for parts a, b, and c of this problem.)
a. Compute the anticipated return after financing costs with the most aggressive asset financing mix.
b. Compute the anticipated return after financing costs with the most conservative asset financing mix.
c. Compute the anticipated return after financing costs with the two moderate approaches to the asset financing mix.
d. Would you necessarily accept the plan with the highest return after financing costs? Briefly explain.
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.
Regis Clothiers can borrow from its bank at 17 percent to take a cash discount. The terms of the cash discount are 3/19, net 45. Should the firm borrow the funds?
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