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Chapter 3: 1DQ (page 218)
In the management of cash and marketable securities, why should the primary concern be for safety and liquidity rather than maximization of profit?
The cash and marketable securities are used to manage the liquid assets and secure the liquidity risk, not generate profits.
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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.
If you borrow \(5,300 at \)400 interest for one year, what is your effective interest rate for the following payment plans?
d. Monthly payments.
Biochemical Corp. requires $550,000 in financing over the next three years. The firm can borrow the funds for three years at 10.60 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term financing instead, she will pay 8.75 percent interest in the first year, 13.25 percent interest in the second year, and 10.15 percent interest in the third year. Determine the total interest cost under each plan. Which plan is less costly?
Route Canal Shipping Company has the following schedule for aging of accounts receivable:
a. Fill in column (4) for each month.
Age of receivables April 30 20X1 | |||
1 | 2 | 3 | 4 |
Month of sales | Age of accounts | Amounts | Percent of amount due |
April | 0-30 | \(131,250 | ____ |
March | 31-60 | \)93,750 | ____ |
February | 61-90 | \(112,500 | ____ |
January | 91-120 | \)37,500 | ____ |
Total receivables | $375,000 | 100% |
Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and after-tax costs would decline by \(36,000, but inventory would increase by \)300,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 13.5 percent.
a. Determine the extra cost or savings of switching over to level production. Should the company go ahead and switch to level production?
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