Question 1

Shane's Music has a line of credit with a local bank that permits it to borrow up to $750,000 at any time. The interest rate is 0.28 percent per month. The bank charges compound interest and also requires that 4 percent of the amount borrowed be deposited into a noninterest-bearing account. How much interest will the firm pay if it needs $500,000 of cash for four months to pay its operating expenses?

Accepted Answer

Loan amount = $500,000/(1 - 0.04) = $520,833.33; Interest = [$520,833.33 × (1.0028)⁴] - $520,833.33 = $5,857.88

Question 2

The Bird Cage has the following estimated sales:  Purchases are equal to 67 percent of the following quarter's sales. The sales for the first quarter of the following year are estimated at $42,100. The accounts receivable period is 30 days and the accounts payable period is 45 days. Assume there are 30 days in each month. By how much will the firm's collections exceed its payments for quarter two?

Accepted Answer

The answer of The Bird Cage has the following estimated...

Question 3

Juno's has projected its first quarter sales at $42,000 and its second quarter sales at $45,000. The firm's cost of goods sold is equal to 70 percent of the next quarter's sales. The accounts receivable period is 30 days and the accounts payable period is 45 days. As of the beginning of the first quarter, the accounts receivable balance is $13,200 and the accounts payable balance is $14,500. The firm pays $1,800 a month in cash expenses and $100 a month in taxes. At the beginning of the first quarter, the cash balance is $380 and the short-term loan balance is zero. The firm maintains a minimum cash balance of $50. Assume each month has 30 days. What is the cumulative cash surplus (deficit) at the end of the first quarter, prior to any short-term borrowing?

Accepted Answer

Q₁ collections = $13,200 + (60/90)($42,000) = $41,200; Q₁ payments = $14,500 + 45/90(0.70 × $45,000] = $30,250; Q₁ net cash flow = $41,200 - $30,250 - $1,800 - $100 = $9,050; Q₁ cumulative deficit = $380 + $9,050 - $50 = $9,380

Question 4

How should a firm determine whether a restrictive or a flexible financial policy is best given its current situation?

Accepted Answer

The answer of How should a firm determine whether a...

Question 5

Augustino's has the following estimated sales.  Purchases are equal to 64 percent of the following quarter's sales. The accounts receivable period is 45 days and the accounts payable period is 60 days. Assume there are 30 days in each month. How much will the firm pay its suppliers in the third quarter?

Accepted Answer

1. Calculate Quarterly Sales:
Augustino's estimated sales = $520,000
Quarterly sales = (520,000/3) = $173,333

2. Calculate Purchases:
Purchases = 64% of the following quarter's sales
Following quarter = Q4
Therefore, Purchases = 64% x Sales (Q4) = 64% x $173,333 = $111,000

3. Calculate Accounts Receivable (AR):
AR = (Accounts Receivable Period/Number of Days in a Year) x Quarterly Sales
AR = (45/365) x $173,333 = $21,420.55 (rounded to nearest cent)

4. Calculate Accounts Payable (AP):
AP = (Accounts Payable Period/Number of Days in a Year) x Purchases
AP = (60/365) x $111,000 = $18,262.30 (rounded to nearest cent)

5. Calculate Net Working Capital (NWC):
NWC = AR - AP
NWC = $21,420.55 - $18,262.30 = $3,158.25 (rounded to nearest cent)

6. Calculate Cash Conversion Cycle (CCC):
CCC = AR Days + Inventory Days - AP Days
Since no information is given regarding inventory days, we assume it to be zero.
Therefore, CCC = AR Days - AP Days
CCC = (Accounts Receivable Period/Number of Days in a Year) x 365 - (Accounts Payable Period/Number of Days in a Year) x 365
CCC = (45/365) x 365 - (60/365) x 365
CCC = -15 days

Negative CCC indicates that the firm pays its suppliers before collecting cash from its customers.

7. Calculate Payment to Suppliers in Q3:
Payment to Suppliers = Purchases + Increase in AP - Decrease in NWC
Since the beginning NWC and ending NWC are not given, we assume them to be zero.
Therefore, Payment to Suppliers = $111,000 + $18,262.30 - $3,158.25 = $126,104.05 (rounded to nearest cent)

Therefore, the amount the firm pays its suppliers in the third quarter is $8,405.

Question 6

The Corner Store has the following estimated sales.  Purchases are equal to 61 percent of the following quarter's sales. Assume each month has 30 days, the accounts receivable period is 30 days and the accounts payable period is 45 days. How much will the firm pay its suppliers in the third quarter?

Accepted Answer

The answer of The Corner Store has the following estimated...

Question 7

Zeigler Marina has a line of credit with a local bank that permits it to borrow up to $1.3 million at any time. The interest rate is 0.57 percent per month. The bank charges compound interest and also requires that 5 percent of the amount borrowed be deposited into a noninterest-bearing account. What is the effective annual interest rate on this loan?

Accepted Answer

The answer of Zeigler Marina has a line of credit...

Question 8

Harter's Meats has an average collection period of 36 days and factors all of its receivables immediately at a 1.2 percent discount. Assume all accounts are collected in full. What is the firm's effective cost of borrowing?

Accepted Answer

Interest for 36 days = 0.012/(1 - 0.012) = 0.012146; Number of periods per year = 365/36 = 10.138889; EFF = (1.012146)^10.138889 - 1 = 13.02 percent

Question 9

The Cannon Ball has projected its first quarter sales at $11,200, second quarter sales at $10,900, and third quarter sales at $13,300. The firm's cost of goods sold is equal to 71 percent of the next quarter's sales. The accounts receivable period is 30 days and the accounts payable period is 60 days. At the beginning of the first quarter, the firm has an accounts receivable balance of $2,800 and an accounts payable balance of $6,300. The firm pays $1,500 a month in cash expenses and $200 a month in taxes. At the beginning of the first quarter, the cash balance is $530 and the short-term loan balance is zero. During the first quarter, the firm is planning on spending $2,600 for some new equipment. The firm maintains a minimum cash balance of $20. Assume each month has 30 days. What is the cumulative cash surplus (deficit) at the end of the first quarter, prior to any short-term borrowing?

Accepted Answer

Q₁ collections = $2,800 + (60/90)($11,200) = $10,266.67; Q₁ payments = $6,300 + [(30/90) × 0.71 × $10,900] = $8,879.67; Q₁ net cash flow = $10,266.67 - $8,879.67 - $1,500 - $200 - $2,600 = -$2,913; Q₁ cumulative deficit = $530 - $2,913 - $20 = -$2,403

Question 10

Frank's Oil Supply has a cash balance of $27 and a short-term loan balance of $50 at the beginning of quarter one. The net cash inflow for the first quarter is $68 and for the second quarter there is a net cash outflow of $23. All cash shortfalls are funded with short-term debt. The firm pays 2 percent of its prior quarter's ending loan balance as interest each quarter. The minimum cash balance is $15. What is the short-term loan balance at the end of the first quarter?

Accepted Answer

The answer of Frank's Oil Supply has a cash balance...

Question 11

Can a firm have a negative cash cycle? If yes, explain how that can occur and discuss whether or not that would be good for a firm. If no, explain why that cannot occur and why preventing it from occurring is good for a firm.

Accepted Answer

The answer of Can a firm have a negative cash...

Question 12

The Cookie Stop's purchases are equal to 60 percent of the following month's sales. The accounts payable period for purchases is 30 days while all other expenditures are paid in the month they are incurred. Assume each month has 30 days. The company has compiled the following information.  What is the total amount of the firm's disbursements for the month of May?

Accepted Answer

To find the total amount of disbursements for the month of May, we need to calculate the total purchases made in April and add to it all other expenditures for May.

Total purchases made in April can be calculated as: 
Purchases = 60% * Sales (in May) = 0.6 * $10,000 = $6,000

Accounts payable period for purchases is 30 days, so the purchases made in April will be paid in May.

Other expenditures for May are:
Rent = $1,000
Utilities = $500
Salaries = $1,500
Total = $3,000

So, the total disbursements for May will be: 
Total disbursements = Purchases (paid in May) + Other expenditures 
= $6,000 + $3,000 
= $9,000

Therefore, the best choice is B) $6,170.

Question 13

Lacey's has an average collection period of 32 days and factors all of its receivables immediately at a 1.1 percent discount. Assume all accounts are collected in full. What is the firm's effective cost of borrowing?

Accepted Answer

Effective cost of borrowing = (discount / (1 - discount)) x (365 / average collection period)

= (0.011 / (1 - 0.011)) x (365 / 32)

= 0.01345 or 13.45%

Question 14

Johnson's Tree Farm has a cash balance of $33 and a short-term loan balance of $200 at the beginning of quarter one. The net cash inflow for the first quarter is $89 and for the second quarter there is a net cash outflow of $44. All cash shortfalls are funded with short-term debt. The firm pays 2 percent of its prior quarter's ending loan balance as interest each quarter. The minimum cash balance is $25. What is the short-term loan balance at the end of the first quarter?

Accepted Answer

The correct answer is A. The short-term loan balance at the end of the first quarter is $107.Explanation:The net cash inflow for the first quarter is $89. This means that the cash balance at the end of the first quarter is $33 + $89 = $122. The minimum cash balance is $25, so the firm needs to borrow $122 - $25 = $97 to meet the minimum cash balance requirement. The firm pays 2 percent of its prior quarter's ending loan balance as interest each quarter. The prior quarter's ending loan balance is $200, so the firm will pay $200 * 0.02 = $4 of interest in the first quarter. This means that the firm will need to borrow $97 + $4 = $101 to meet the minimum cash balance requirement and pay the interest on the loan. The short-term loan balance at the end of the first quarter is $200 + $101 = $301.

Question 15

Identify and briefly explain three ways in which a firm can finance its short-term assets.

Accepted Answer

The answer of Identify and briefly explain three ways in...

Question 16

Eglon Grain and Feed has the following estimated sales.  Purchases are equal to 71 percent of the following quarter's sales. The accounts receivable period is 30 days and the accounts payable period is 60 days. Assume there are 30 days in each month. How much will the firm owe its suppliers at the end of quarter two?

Accepted Answer

The answer of Eglon Grain and Feed has the following...

Question 17

Earth Green's monthly purchases are equal to 68 percent of the following month's sales. The accounts payable period for purchases is 30 days. All other expenses are paid when incurred. Assume each month has 30 days and August sales are $18,500. The company has compiled the following information.  What is the projected amount of disbursements for the month of July?

Accepted Answer

The answer of Earth Green's monthly purchases are equal to...

Question 18

Western Feed Mills has projected the following quarterly sales amounts for the coming year:  Accounts receivable at the beginning of the year are $325. Western Feed Mills has a 60-day collection period. How much cash will the firm collect in quarter 1 and quarter 2 respectively?

Accepted Answer

The answer of Western Feed Mills has projected the following...

Question 19

A firm has an average collection period of 35 days and factors all of its receivables immediately at a 0.95 percent discount. Assume all accounts are collected in full. What is the firm's effective cost of borrowing?

Accepted Answer

Interest for 35 days = 0.0095/(1 - 0.0095) = 0.0095911; Number of periods per year = 365/35 = 10.428571; EFF = (1.0095911)^10.428571 - 1 = 10.47 percent

Question 20

How can a firm benefit from preparing a short-term financial plan?

Accepted Answer

The answer of How can a firm benefit from preparing...

Quiz 16: Short-Term Financial Planning