Chapter+16 - Solutions PDF

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Chapter 16 Current Liabilities Management ◼ Solutions to Problems P16-1. Payment dates LG 1; Basic a.

P16-2. Cost of giving up cash discount LG 1; Basic a. (0.02  0.98)  (365  20) b. (0.01  0.99)  (365  20) c. (0.01  0.99)  (365  35) d. (0.03  0.97)  (365  80) e. (0.01  0.99)  (365  50) f. (0.03  0.97)  (365  20) g. (0.04  0.96)  (365  170)

= 37.24% = 18.43% = 10.53% = 14.11% = 7.37% = 56.44% = 8.95%

P16-3. Credit terms LG 1; Basic a.

b. 2/15 net 30 date of invoice – 30 days – 3/7 net 45 date of invoice – 45 days – c. 2/15, net 30 date of invoice © Pearson Education Limited, 2015.

Chapter 16

Current Liabilities Management

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Cost of giving up the discount = [2 / (100 ‒ 2)]  [365 / 15] = 49.66% 1.5/10, net 60 EOM Cost of giving up the discount = [1.5 / (100 − 1.5)]  [365 / (66 − 10)] = 9.93% 3/7, net 45 date of invoice Cost of giving up the discount = [3 / (100 − 3)]  [365 / 38] = 29.71% 3.5/15, net 30 EOM Cost of giving up the discount = [3.5 / (100 − 3.5)]  [365 / ( − = 63.04% d. The cost of giving up the discount for three invoices (except the invoice with 1.5/10, net 60 EOM) exceed the cost of short-term financing, therefore it is recommended that she should take the discount for those three invoices. P16-4. Cash discount versus loan LG 1; Basic 

P16-5. Personal finance: Borrow or pay cash for an asset LG 2; Intermediate a.

Calculate the down payment on the loan Loan principal Down payment required Cash down payment on loan

$

3,000 10% $ 300.00

b.

c.

d.

Cash price of dining room set Cash rebate Cash purchase after rebate Less: Cash down payment on loan Net initial cash outlay under cash purchase option − This is the marginal amount of money needed Earnings on savings Years Net initial cash outlay Opportunity cost under the cash purchase option ($2,500  (1.0522 − 1)

e.

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$ $ $ $

3,000 200 2,800 (300) 2,500

5.20% 2 $ 2,500 $ 267

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Gitman • Principles of Managerial Finance, Fourteenth Edition, Global Edition



f.

P16-6. Cash discount decisions LG 1, 2; Intermediate a. Approximate cost of giving up discount from each supplier: J: 1% × (365/25) = 14.6% K: 2% × (365/60) = 12.17% L: 1% × (365/45) = 8.11% M: 3% × (365/80) = 13.69% b.

P16-7. Changing payment cycle LG 2; Basic

=



=

P16-8. Spontaneous sources of funds, accruals LG 2; Intermediate  P16-9. Cost of bank loan LG 3; Intermediate a. InterestA = ($10,000  0.12)  (120 / 365) = $394.52 InterestB = ($10,000  0.15)  (90 / 365) = $369.86 Bank B – lower interest payment. b. Effective 120-day rate = $394.52 / $10,000 = 3.95% Effective 90-day rate = $369.86 / $10,000 = 3.70% c. Effective annual rateA = (1 + 0.0395)3 ‒ 1 = 12.32% Effective annual rateA = (1 + 0.0370)4 ‒ 1 = 15.64%

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Bank A – lower effective annual rate charged. P16-10. Personal finance: Unsecured sources of short-term loans LG 3; Challenge a. Interest expense = $55,000  (0.06 + 0.02)  (180 / 365) = $2,169.86 b. Time period Prime rate % over prime Applicable % Amount owned Interest Interest expense

=

Day 0 to 60 6% 1% 7% $55,000 $632.88 $2,011.65

Day 60 to 90 6% 1.25% 7.25% $55,000 $327.74

Day 91 to180 6% 1.75% 7.75% $55,000 $1,051.03

c. The variable-rate loan is less costly ($2,011.65) than the fixed-rate loan ($2,169.86), provided the increases in the prime rate do not exceed the economists’ estimations. Therefore Lindsey should take the variable-rate loan. P16-11. Effective annual rate LG 3; Basic

−

P16-12. Compensating balances and effective annual rates LG 3; Intermediate a. Compensating balance requirement = $500,000  0.1 = $50,000 Amount of loan available for use = $500,000 − $50,000 = $450,000 Interest paid = $500,000  0.125 = $62,500 Effective interest rate = $62,500 / $450,000 = 13.89% b. Additional balances required = $50,000 − 45,000 = $5,000 Effective interest rate = $62,500 / (500,000 − 5,000) = 12.63% c.

Effective interest rate

P16-13. Compensating balance versus discount loan LG 3; Intermediate a. Helping Hand interest © Pearson Education Limited, 2015.

−

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Gitman • Principles of Managerial Finance, Fourteenth Edition, Global Edition

= ($135,000  0.08 0.5) / [135,000 − (135,000  0.1)] = 9.09% 



− +





−

b. . P16-14. Integrative—comparison of loan terms LG 3; Challenge a. (0.08 + 0.033)  0.80 = 14.125% [$2,000,000  (0.08 + 0.028) + (0.005 $2,000,000)] = 14.125% b. Effective annual interest rate = ($2,000,000  0.80) c. The revolving credit account seems better because the cost of the two arrangements is the same; with a revolving loan arrangement, the loan is committed. P16-15. Cost of commercial paper LG 4; Intermediate a. Effective 120-day rate = (1,000,000 − $984,000) / $984,000 = 1.63% Effective annual rate = (1 + 0.0163)360/120 − 1 = 5.04% b. Effective 120-day rate = (1,000,000 − $984,000 + $8,427) / ($984,000 − $8,427) = 2.5% Effective annual rate = (1 + 0.0250)365/120 − 1 = 7.81% P16-16. Accounts receivable as collateral LG 5; Intermediate a. Acceptable accounts receivable Customer

Amount

D E F H J K Total collateral

$ 8,000 50,000 12,000 46,000 22,000 62,000 $200,000

b. Adjustments: 5% returns/allowances, 80% advance percentage. © Pearson Education Limited, 2015.

Chapter 16 Current Liabilities Management

Level of available funds = [$200,000  (1 − 0.05)]  0.80 = $152,000 P16-17. Accounts receivable as collateral LG 5; Intermediate a. Customer Amount A

$ 5,000

B

$ 18,000

D

$ 14,000

F

$ 4,500

G

$ 1,500

H

$20,000

TOTAL

$63,000

b.

Acceptable collateral = $63,000  (1 − 0.1) = $56,700

c.

Borrowings = 0.8  $56,700 = $45,360

P16-18. Accounts receivable as collateral, cost of borrowing LG 3, 5; Challenge a. [$134,000 − ($134,000  0.10)]  0.85 = $102,510 b. ($100,000  0.02) + ($100,000  0.115) = $2,000 + $11,500 = $13,500 $13,500 = 13.5% for 12 months Interest cost = $100,000 0.115   = $2,000 + $5,750 = $7,750 ($100,000  0.02) +  $100,000  2   $7,750 Interest cost = = 7.75% for 6 months $100,000

Effective annual rate = (1 + 0.0775)2 − 1 = 16.1% 0.115  ($100,000  0.02) +  $100,000  = $2,000 + $2,875 = $4,875 4   $4,875 = 4.88% for 3 months Interest cost = $100,000

Effective annual rate = (1 + 0.0488)4 − 1 = 21.0%

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Gitman • Principles of Managerial Finance, Fourteenth Edition, Global Edition

P16-19. Factoring LG 5; Intermediate Holder Company Factored Accounts May 30 Accounts

Amount

Date Due

Status on May 30

Amount Remitted

Date of Remittance

A B C D E F G H

$200,000 90,000 110,000 85,000 120,000 180,000 90,000 30,000

5/30 5/30 5/30 6/15 5/30 6/15 5/15 6/30

C 5/15 U U C 5/30 C 5/27 C 5/30 U C 5/30

$196,000 88,200 107,800 83,300 117,600 176,400 88,200 29,400

5/15 5/30 5/30 5/30 5/27 5/30 5/15 5/30

The factor purchases all acceptable accounts receivable on a nonrecourse basis, so remittance is made on uncollected as well as collected accounts. P16-20. Inventory financing LG 1, 6; Challenge a. City-Wide Bank: [$75,000  (0.12  12)] +(0.0025  $100,000) = $1,000 Sun State Bank: $100,000  (0.13  12) = $1,083 Citizens’ Bank and Trust: [$60,000  (0.15  12)] + (0.005  $60,000) = $1,050 b. City-Wide Bank is the best alternative because it has the lowest cost. c. Cost of giving up cash discount = (0.02  0.98)  (365  20) = 37.24% The effective cost of taking a loan = ($1,000  $75,000)  12 = 16.00% Because the cost of giving up the discount (37.24%) is higher than borrowing at Citywide Bank (16%), the firm should borrow to take the discount. P16-21. Ethics problem LG 2; Intermediate The sales tax can be calculated based on the sales data, as follows: Sales tax = [($73,000,000 − $13,000,000)  1.05]  0.05 = $2,857,143 An alternative method is to determine the taxable sales based on the sales tax reported. Taxable sales = $2,000,000 ÷ 0.05 = $40,000,000 These calculations show a discrepancy in the financial statement provided by Rancco. The company has possibly underreported the amount of taxable income to the state and failed to pay the appropriate amount of sales tax. The other alternative is that Rancco has deliberately inflated the amount of revenues for the year in an attempt to improve the chances of getting the loan. You will want to have the company verify its calculation of sales tax due. Notice that to be able to make a valid comparison of sales taxes paid and revenues reported, you must also determine the correct amount of nontaxable revenue, which is usually not directly available from the company’s financial statements.

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