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Chapter 3: 18BP_d (page 251)
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.
The effective interest rate is 13.93%.
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How is a cash budget used to help manage current assets?
Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide \(180,000 in additional credit sales, 12 percent are likely to be uncollectible. The company will also incur \)16,200 in additional collection expense. Production and marketing costs represent 72 percent of sales. The firm is in a 34 percent tax bracket and has a receivables turnover of four times. No other asset build-up will be required to service the new customers. The firm has a 10 percent desired return.
a. Calculate the incremental income after taxes and the return on incremental investment. Should Fast Turnstiles Co. extend credit to these customers?
Route Canal Shipping Company has the following schedule for aging of accounts receivable:
e. What additional information does the aging schedule bring to the company that the average collection period may not show?
What does the term structure of interest rates indicate?
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.
a. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 75 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest rate is 15 percent on long-term funds and 10 percent on short-term financing.
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