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Chapter 3: 13BP_b (page 250)
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?
The effective interest rate is 11.25%.
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Explain how rapidly expanding sales can drain the cash resources of a firm.
Lear Inc. has \(840,000 in current assets, \)370,000 of which are considered permanent current assets. In addition, the firm has \(640,000 invested in fixed assets.
a. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 8 percent. The balance will be financed with short-term financing, which currently costs 7 percent. Lear鈥檚 earnings before interest and taxes are \)240,000. Determine Lear鈥檚 earnings after taxes under this financing plan. The tax rate is 30 percent.
In the second year, Fisk Corporation finds that it can reduce ordering costs to \(2 per order but that carrying costs stay the same at \)1.60 per unit. Also, volume remains at 49,000 units per year.
b. How many orders will be placed during the year?
Discuss the relative use of credit between large and small firms. Which group is generally in the net creditor position, and why?
A firm that uses short-term financing methods for a portion of permanent current assets is assuming more risk but expects higher returns than a firm with a normal financing plan. Explain.
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