Brady and Sons uses accounts receivable as collateral to borrow money for operations and payroll when revenues are low. If the company borrows $1,950,000 now at a monthly interest rate of 1.5%, but the rate drops to 0.85 percent after 3 months, how much will the company owe after 1 year?
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- The Raattama Corporation had sales of $3.5 million last year, and it earned a 5% return (after taxes) on sales. Recently, the company has fallen behind in its accounts payable. Although its terms of purchase are net 30 days, its accounts payable represents 60 days’ purchases. The company’s treasurer is seeking to increase bank borrowing in order to become current in meeting its trade obligations (that is, to have 30 days’ payables outstanding). The company’s balance sheet is as follows (in thousands of dollars): How much bank financing is needed to eliminate the past-due accounts payable? Assume that the bank will lend the firm the amount calculated in part a. The terms of the loan offered are 8%, simple interest, and the bank uses a 360-day year for the interest calculation. What is the interest charge for 1 month? (Assume there are 30 days in a month.) Now ignore part b and assume that the bank will lend the firm the amount calculated in part a. The terms of the loan are 7.5%, add-on interest, to be repaid in 12 monthly installments. What is the total loan amount? What are the monthly installments? What is the APR of the loan? What is the effective rate of the loan? Would you, as a bank loan officer, make this loan? Why or why not?Now assume that it is several years later. The brothers are concerned about the firm’s current credit terms of net 30, which means that contractors buying building products from the firm are not offered a discount and are supposed to pay the full amount in 30 days. Gross sales are now running $1,000,000 a year, and 80% (by dollar volume) of the firm’s paying customers generally pay the full amount on Day 30; the other 20% pay, on average, on Day 40. Of the firm’s gross sales, 2% ends up as bad-debt losses. The brothers are now considering a change in the firm’s credit policy. The change would entail: (1) changing the credit terms to 2/10, net 20, (2) employing stricter credit standards before granting credit, and (3) enforcing collections with greater vigor than in the past. Thus, cash customers and those paying within 10 days would receive a 2% discount, but all others would have to pay the full amount after only 20 days. The brothers believe the discount would both attract additional customers and encourage some existing customers to purchase more from the firm—after all, the discount amounts to a price reduction. Of course, these customers would take the discount and hence would pay in only 10 days. The net expected result is for sales to increase to $1,100,000; for 60% of the paying customers to take the discount and pay on the 10th day; for 30% to pay the full amount on Day 20; for 10% to pay late on Day 30; and for bad-debt losses to fall from 2% to 1% of gross sales. The firm’s operating cost ratio will remain unchanged at 75%, and its cost of carrying receivables will remain unchanged at 12%. To begin the analysis, describe the four variables that make up a firm’s credit policy and explain how each of them affects sales and collections.Brady and Sons uses accounts receivable as collateral to borrow money for operations and payroll when revenues are low. If the company borrows $300,000 now at an interest rate of 12% per year, compounded monthly, and the rate increases to 15% per year, compounded monthly after 4 months, how much will the company owe at the end of 1 year?
- Lowe and Price Co has annual credit sales of $12,000,000, and three months are allowed for payment. The company decides to offer a 2% discount for payments made within ten days of the invoice being sent, and to reduce the maximum time allowed for payment to two months. It is estimated that 50% of customers will take the discount. The company requires a 20% return on investments. Assume that the volume of sales will be unaffected by the discount. What is the reduction in accounts receivable? What is the opportunity income from the reduction in accounts receivable? What is the discount allowed each year? What is the net benefit of new discount policy each year?Taylor Glass has annual sales of $1,790,000. Although it extends credit for 30 days (n30), the receivables are 20 days overdue. What is the average accounts receivable outstanding, and how much could the company save in interest expense if customers paid on time and if it costs Taylor Glass 9 percent to carry its receivables? Assume 360 days in a year. Round your answers to the nearest cent. Accounts receivable: $ Interest saved: $ABC Corp. has net credit sales of P1,440,000 yearly with credit terms of n/30, which is also the average collection period. BECK does not offer discounts for early payment; thus, customers take the full 30 days to pay. (Use 360 days/year) If BECK offered 2% discount for payment in 10 days and every customer took advantage of the new terms, what would the new averagereceivable balance be? Continuing from the situation in (1), if BECK reduces its bank loans which cost 10%, by the cash generated from reduced receivables, what will be the net gain/loss to the firm?
- Suppose a company borrowed $1 million at a rate of 9% simple interest, with interestpaid at the end of each month. The bank uses a 360-day year. How much interestwould the firm have to pay in a 30-day month? What would the interest be if thebank used a 365-day year? [(0.09/360) (30) ($1,000,000) 5 $7,500 interest for themonth. For the 365-day year, (0.09/365)(30)($1,000,000) 5 $7,397.26 of interest.The use of a 360-day year raises the interest cost by $102.74, which is whybanks like to use it on loans.]A company owes Php 80,000 which includes the interest, to be paid one year from now by monthly deposits. The company deposits Php 2,000 at the end of the first month, Php 3,000 for the second month and increasing the deposits in each succeeding month by 50% until the 12th month. If the interest rate is 9% compounded monthly, will the total amount of deposits beenough to repay the debt? If not, how much more is needed?
