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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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Under what circumstances would it be advisable to borrow money to take a cash discount?
Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is \(150,000. The company can borrow \)150,000 for three years at 10 percent annual interest or for one year at 8 percent annual interest.
How much would Sauer Food Company save in interest over the three-year life of the computer system if the one-year loan is utilized and the loan is rolled over (reborrowed) each year at the same 8 percent rate? Compare this to the 10 percent three-year loan. What if interest rates on the 8 percent loan go up to 13 percent in year 2 and 18 percent in year 3? What would be the total interest cost compared to the 10 percent, three-year loan?
In the management of cash and marketable securities, why should the primary concern be for safety and liquidity rather than maximization of profit?
What is the difference between pledging accounts receivable and factoring accounts receivable?
Colter Steel has \(4,200,000 in assets.
Temporary current assets | \)1,000,000 |
Permanent current assets | \(2,000,000 |
Fixed assets | \)1,200,000 |
Total assets | \(4,200,000 |
Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are \)996,000. The tax rate is 40 percent. If long-term financing is perfectly matched (synchronized) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be? For a graphical example of perfectly matched plans, see Figure 6-5.
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