Current Liabilities Management

Tangshan Mining was extended credit terms of 3/15 net 30 EOM.

The cost of giving up the cash discount, assuming payment
would be made on the last day of the credit period, would be
_________. If the firm were able to stretch its accounts
payable to 60 days without damaging its credit rating, the
cost of giving up the cash discount would only be _________.

(a) 72.99%; 18.81%.

(b) 72.99%; 18.25%.
(c) 75.25%; 21.90%.
(d) 75.25%; 22.58%.

Tangshan Mining borrowed $100,000 for one year under a line of

credit with a stated interest rate of 7.5 percent and a 15
percent compensating balance. Normally, the firm keeps almost
no money in its checking account. Based on this information,
the effective annual interest rate on the loan is
(a) 7.5%
(b) 8.0%
(c) 8.8%
(d) 7.2%

A&A Company purchased a new machine on October 20th, 2003 for

$1,000,000 on credit. The supplier has offered A&A terms of
2/10, net 45. The current interest rate the bank is offering
is
16 percent.
(a) Compute the cost of giving up cash discount.

(b) Should the firm take or give up the cash discount?

 (c) What is the effective rate of interest if the firm
decides to take the cash discount by borrowing money on
a discount basis?

Mime Theatrical Supply is in the process of negotiating a line

of credit with two local banks. The prime rate is
currently 8 percent. The terms follow:
Bank Loan Terms
1st 1 percent above prime rate on a
National discounted basis and a 20
percent compensating balance on the
face value of the loan.
2nd 2 percent above prime rate and a 15
National percent compensating
balance.
(a) Calculate the effective interest rate of both banks.
(b) Recommend which bank’s line of credit Mime

Giant Feeds, Inc. is considering obtaining funding through

advances against receivables. Total annual credit sales
are $600,000, terms are net 30 days, and payment is made
on the average of
30 days. Western National Bank will advance funds under a
pledging arrangement for 13 percent annual interest. On
average, 75 percent of credit sales will be accepted as
collateral. Commodity Finance offers factoring on a
nonrecourse basis for a 1 percent factoring commission,
charging
1.5 percent per month on advances and requiring a 15
percent factor’s reserve. Under this plan,
the firm would factor all accounts and close its credit
and collections department, saving $10,000 per year.
(a) What is the effective interest rate and the average
amount of funds available under pledging and under
factoring
 (b) Which plan do you recommend? Why?

A firm arranged for a 120-day bank loan at an annual rate of

interest of 10 percent. If the loan is for $100,000, how
much interest in dollars will the firm pay? (Assume a 360-
day year.)
(a) $10,000.
(b) $30,000.
(c) $3,333.
(d) $1,000.