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Chapter 3: 3BP (page 249)
Simmons Corp. can borrow from its bank at 17 percent to take a cash discount. The terms of the cash discount are 1.5/10, net 45. Should the firm borrow the funds?
The firm should not borrow the funds.
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What are three quantitative measures that can be applied to the collection policy of the firm?
Carmen鈥檚 Beauty Salon has estimated monthly financing requirements for the next six months as follows:
January | \(8,500 |
February | \)2,500 |
March | \(3,500 |
April | \)8,500 |
May | \(9,500 |
June | \)4,500 |
Short-term financing will be utilized for the next six months.
January | 9% |
February | 10% |
March | 13% |
April | 16% |
May | 12% |
June | 12% |
Here are the projected annual interest rates:
a. Compute total dollar interest payments for the six months. To convert an annual rate to a monthly rate, divide by 12. Then multiply this value times the monthly balance. To get your answer, add up the monthly interest payments.
b. If long-term financing at 12 percent had been utilized throughout the six months, would the total-dollar interest payments be larger or smaller? Compute the interest owed over the six months and compare your answer to that in part a.
Explain why the bad debt percentage or any other similar credit-control percentage is not the ultimate measure of success in the management of accounts receivable. What is the key consideration?
Guardian Inc. is trying to develop an asset financing plan. The firm has \(400,000 in temporary current assets and \)300,000 in permanent current assets. Guardian also has $500,000 in fixed assets. Assume a tax rate of 40 percent.
c. What would happen if the short- and long-term rates were reversed?
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