Short Term Financing Paper 5

1

A firm that often factors its accounts receivable has an agreement with its finance company that requires the firm to maintain a 6% reserve and charges a 1.4% commission on the amount of the receivables. The net proceeds would be further reduced by an annual interest charge of 15% on the monies advanced. Assuming a 360-day year, what amount of cash (rounded to the nearest dollar) will the firm receive from the finance company at the time a $100,000 account that is due in 60 days is turned over to the finance company?






2

The Frame Supply Company has just acquired a large account and needs to increase its working capital by $100,000. The controller of the company has identified the four sources of funds given below.
1.Pay a factor to buy the company’s receivables, which average $125,000 per month and have an average collection period of 30 days. The factor will advance up to 80% of the face value of receivables at 10% and charge a fee of 2% on all receivables purchased. The controller estimates that the firm would save $24,000 in collection expenses over the year. Assume the fee and interest are not deductible in advance.
2.Borrow $110,000 from a bank at 12% interest. A 9% compensating balance would be required.
3.Issue $110,000 of 6-month commercial paper to net $100,000. (New paper would be issued every 6 months.)
4.Borrow $125,000 from a bank on a discount basis at 20%. No compensating balance would be required.
Assume a 360-day year in all of your calculations.
The cost of Alternative 2 to Frame Supply Company is






3

The Frame Supply Company has just acquired a large account and needs to increase its working capital by $100,000. The controller of the company has identified the four sources of funds given below.
1.Pay a factor to buy the company’s receivables, which average $125,000 per month and have an average collection period of 30 days. The factor will advance up to 80% of the face value of receivables at 10% and charge a fee of 2% on all receivables purchased. The controller estimates that the firm would save $24,000 in collection expenses over the year. Assume the fee and interest are not deductible in advance.
2.Borrow $110,000 from a bank at 12% interest. A 9% compensating balance would be required.
3.Issue $110,000 of 6-month commercial paper to net $100,000. (New paper would be issued every 6 months.)
4.Borrow $125,000 from a bank on a discount basis at 20%. No compensating balance would be required.
Assume a 360-day year in all of your calculations.
The cost of Alternative 3 to Frame Supply Company is






4

The Frame Supply Company has just acquired a large account and needs to increase its working capital by $100,000. The controller of the company has identified the four sources of funds given below.
1.Pay a factor to buy the company’s receivables, which average $125,000 per month and have an average collection period of 30 days. The factor will advance up to 80% of the face value of receivables at 10% and charge a fee of 2% on all receivables purchased. The controller estimates that the firm would save $24,000 in collection expenses over the year. Assume the fee and interest are not deductible in advance.
2.Borrow $110,000 from a bank at 12% interest. A 9% compensating balance would be required.
3.Issue $110,000 of 6-month commercial paper to net $100,000. (New paper would be issued every 6 months.)
4.Borrow $125,000 from a bank on a discount basis at 20%. No compensating balance would be required.
Assume a 360-day year in all of your calculations.
The cost of Alternative 4 to Frame Supply Company is






5

A company enters into an agreement with a firm that will factor the company’s accounts receivable. The factor agrees to buy the company’s receivables, which average $100,000 per month and have an average collection period of 30 days. The factor will advance up to 80% of the face value of receivables at an annual rate of 10% and charge a fee of 2% on all receivables purchased. The controller of the company estimates that the company would save $18,000 in collection expenses over the year. Fees and interest are not deducted in advance. Assuming a 360-day year, what is the annual cost of financing?






6

The chief financial officer of Smith Glass, Inc., follows the policy of matching the maturity of assets with the maturity of financing. The implications of this policy include all of the following, except that






7

A manufacturer with seasonal sales would be most likely to obtain which one of the following types of loans from a commercial bank to finance the need for a fixed amount of additional capital during the busy season?






8

Which of the following financing vehicles would a commercial bank be likely to offer to its customers?
I. Discounted notes
II. Term loans
III. Lines of credit
IV. Self-liquidating loans






9

On June 30 of this year, Mega Bank granted Lang Corporation a $20 million 5-year term loan with a floating rate of 200 basis points over Treasury Bill rates, payable quarterly. The loan principal is to be repaid in equal quarterly installments over the term. If Treasury Bills are expected to yield 6% for the rest of the year, how much will Lang pay to Mega Bank in the last half of this year?






10

Global Manufacturing Company has a cost of borrowing of 12 . One of the firm’s suppliers has just offered new terms for purchases. The old terms were cash on delivery and the new terms are 2/10, net 45. Should Global pay within the first 10 days?






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