Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
expand_more
expand_more
format_list_bulleted
Videos
Question
Chapter 24, Problem 23PS
Summary Introduction
To determine: The good and poor collateral in each cases.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
You are a credit analyst of a growing commercial bank and have recently received
loan applications from
two companies of relatively
similar size.
Show below are selected financial data for these two applicants at the end of the
current year:
RED CO
BLUE CO.
Net credit sales
P700,000.00
P650,000.00
Cost of goods sold
P500,000.00
P490,000.00
Cash
P60,000.00
P20,000.00
Accounts receivable (net)
P77,000.00
P60,000.00
Inventory
P94,000.00
P180,000.00
Current liabilities
P110,p00.00
P105,000.00
Assume that the year-end balances for accounts receivable and for inventory
approximate the average
balances of these items
throughout the year.
A. Compute the following on BLUE
1. Inventory turnover
2. Days sales in inventory
3. Operating cycle
You are a Corporate Credit Analyst for your bank. A new corporate customer in the manufacturing sector approached your bank for a large credit facility in the sum of $20 million for production equipment and warehousing. The customer submitted the following financials to you.
Would you grant the credit? Justify stating three reasons to support your decision.
Young Company has a 7 percent annual interest rate on its bank loan which the company is in the process of repaying. The loan currently has a principal balance of $15 million. Young Company provides financial statements to the bank in order to meet the bank's loan requirements. Young prepares its financial statements with some help from a local CPA, who provides advice in preparing journal entries and closing the books. Young Company approached several other banks and found two that were willing to offer loans at competitive rates. Country Valley Bank offers a 6 percent annual interestrate for small businesses that involve a CPA in helping prepare their financial statements. Communitv Bank offers a 4.5 percent rate on its loan but would require that Young Company have its financial statements separately audited by an independent CPA firm each year to get that lower rate. Young Company reached out to a local CPA firm and received an estimate of $145,000 annually to provide an…
Chapter 24 Solutions
Principles of Corporate Finance
Ch. 24 - Bond terms Use Table 24.1 (but not the text) to...Ch. 24 - Bond terms Look at Table 24.1: a. The AMAT bond...Ch. 24 - Bond terms Select the most appropriate term from...Ch. 24 - Prob. 5PSCh. 24 - Bond terms Bond prices can fall either because of...Ch. 24 - Security and seniority a. As a senior bondholder,...Ch. 24 - Prob. 8PSCh. 24 - Prob. 9PSCh. 24 - Security and seniority a. Residential mortgages...Ch. 24 - Sinking funds For each of the following sinking...
Ch. 24 - Call provisions a. Look at Table 24.1. Suppose...Ch. 24 - Covenants Alpha Corp. is prohibited from issuing...Ch. 24 - Prob. 14PSCh. 24 - Private placements Explain the three principal...Ch. 24 - Convertible bonds True or false? a. Convertible...Ch. 24 - Convertible bonds Maple Aircraft has issued a 4%...Ch. 24 - Convertible bonds The Surplus Value Company had 10...Ch. 24 - Prob. 19PSCh. 24 - Convertible bonds Iota Microsystems 10%...Ch. 24 - Convertible bonds Zenco Inc. is financed by 3...Ch. 24 - Prob. 22PSCh. 24 - Prob. 23PSCh. 24 - Bank loans, commercial paper, and medium-term...Ch. 24 - Prob. 25PSCh. 24 - Tax benefits Dorlcote Milling has outstanding a 1...Ch. 24 - Convertible bonds This question illustrates that...Ch. 24 - Prob. 28PS
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Bank A is an investment bank. It is involved in arranging mergers and acquisitions and IPOS as well as being a broker in securities. Bank B specialises in car financing. As new cars require a Certificate of Entitlement (COE) which is valid for 10 years, Bank B car loans have a loan period of 10 years or less. The loans have fixed interest rates. Bank C specialises in housing loans with loan periods of 30 years or less, on a floating interest rate basis. Rank the fhree (3) banks' income, in terms of sensitivity to interest rate changes, from lowest to highest sensitivity. Discuss the reasons for your answer.arrow_forwardCommercial company, Wistoria, is applying for a loan from the First Bank of Denmark, which currently has this balance sheet: Assets $4,000,000 Reserves $8,000,000 Loans Liabilities $12,000,000 Demand Deposits a. If the bank of Denmark wants to hold onto reserves equal to 0.25 of its demand deposits, what loan value can the bank of Denmark make? b. If the bank of Denmark makes a loan, and Wistoria decides to take the loan in cash, show the new balance sheet. c. How would withdrawal affect the (M1) money supply?arrow_forwardYoung Company has a 7 percent annual interest rate on its bank loan which the company is in the process of repaying. The loan currently has a principal balance of $15 million. Young Company provides financial statements to the bank in order to meet the bank's loan requirements. Young prepares its financial statements with some help from a local CPA, who provides advice in preparing journal entries and closing the books. Young Company approached several other banks and found two that were willing to offer loans at competitive rates. Country Valley Bank offers a 6 percent annual interestrate for small businesses that involve a CPA in helping prepare their financial statements. Communitv Bank offers a 4.5 percent rate on its loan but would require that Young Company have its financial statements separately audited by an independent CPA firm each year to get that lower rate. Young Company reached out to a local CPA firm and received an estimate of $145,000 annually to provide an…arrow_forward
- Assume that there are 2 chartered banks and their T-accounts are below. Suppose that there are currently deposits of $850,000 in Bank A. Mohit borrows $100,000 from Bank A for a housing deposit to Cheng-Li. Cheng-Li takes that deposit and puts it into his bank, which is Bank B. The required reserve ratio is 18% for all banks. Assume that each bank will use the deposits to make loans and not save any for bank capital or bond purchases. You can use the following balance sheets, for Bank A and Bank B to help you answer the question: What are the reserves in Bank A before the money is borrowed from the bank? Bank A's Balance Sheet Reserves: Loans: Reserves: Loans: Answer: Assets Assets Liabilities Demand Deposits: Bank B's Balance Sheet Liabilities Demand Deposits:arrow_forwardu are the accounting manager for Kool Ragz, Inc., a manufacturer of men's and women's clothing. The company needs to borrow $1,720,000 for 80 days in order to purchase a large quantity of material at "close ces. The interest rate for such loans at your bank, Rimrock Bank, is 9% using ordinary interest. What is the amount of interest on this loan? Round your answer to the nearest cent. After making a few "shopping" calls, you find that Southside National Bank will lend at 9% using exact interest. What is the amount of interest on this offer? Round your answer to the nearest cent. So that you can keep your business, Rimrock Bank has offered a loan at 8.3% using ordinary interest. What is the amount of interest on this offer? Round your answer to the nearest cent. (Challenge) If Southside National wants to beat Rimrock's last offer (part c) by charging $1,100 less interest, what rate, rounded to the nearest hundredths of a percent, must it quote using exact interest? not enter the percent…arrow_forwardI need help for D, E, and G please You are a loan officer at the West Elm Savings and Loan. Mr. and Mrs. Brady are in your office to apply for a mortgage loan on a house they want to buy. The house has a market value of $170,000. Your bank requires 1/5 of the market value as a down payment. (a) What is the amount (in $) of the down payment? $ (b) What is the amount (in $) of the mortgage for which the Bradys are applying? $ (c) Your bank offers the Bradys a 30 year mortgage with a rate of 5%. At that rate, the monthly payments for principal and interest on the loan will be $5.37 for every $1,000 financed. What is the amount (in $) of the principal and interest portion of the Bradys' monthly payment? $ (d) What is the total amount (in $) of interest that will be paid over the life of the loan? $ (e) Your bank also requires that the monthly mortgage payments include property tax and homeowners insurance payments. If the property tax is $1,710 per…arrow_forward
- Suppose you are a relationship manager at an international bank. A customer who recently got admission at a prestigious Business School approached you for an education loan of Rs. 36,00,000. Your bank offers the education loan at 9.6 percent to be repaid in 10 years in EMIs. You are assigned the task of preparing the amortization schedule for the customer and answer the following. Prepare the amortization schedule for the first 5 EMIs. What will be interest paid for 93th EMI? What will be the loan balance after 93th EMI? What is the total interest paid for the loan?arrow_forwardKansas City Castings (KCC) is attempting to obtain the maximum loan possible using accounts receivable as collateral. The firm extends net-30-day credit. The amounts that are owed KCC by its 12 credit customers, the average age of each account, and the customer’s average payment period are as shown in the following table. If the bank will accept all accounts that can be collected in 45 days or less as long as the customer has a history of paying within 45 days, which accounts will be acceptable? What is the total dollar amount of accounts receivable collateral? (Note: Accounts receivable that have an average age greater than the customer’s average payment period are also excluded.) In addition to the conditions in part a, the bank recognizes that 5% of credit sales will be lost to returns and allowances. Also, the bank will lend only 80% of the acceptable collateral (after adjusting for returns and allowances). What level of funds would be made available through this lending…arrow_forwardYou are the accounting manager for Kool Ragz, Inc., a manufacturer of men's and women's clothing. The company needs to borrow $1,300,000 for 90 days in order to purchase a large quantity of material at "closeout" prices. The interest rate for such loans at your bank, Rimrock Bank, is 13% using ordinary interest. (a) What is the amount (in $) of interest on this loan? $ (b) After making a few "shopping" calls, you find that Southside National Bank will lend at 13% using exact interest. What is the amount (in $) of interest on this offer? (Round your answer to two decimal places.) $ (c) So that it can keep your business, Rimrock Bank has offered a loan at 12.5% using ordinary interest. What is the amount (in $) of interest on this offer? $ (d) (Challenge) If Southside National wants to compete with Rimrock's last offer (part c) by charging $1,625 less interest, what rate (as a %), rounded to the nearest hundredths of a percent, must it quote using exact interest? % Need Help? Read Itarrow_forward
- Assume that your team is in business and you must borrow $6,000 cash for short-term needs. You have been shopping banks for a loan, and you have the following two options. A. Sign a $6,000, 90-day, 10% interest-bearing note dated June 1. B. Sign a $6,000, 120-day, 8% interest-bearing note dated June 1. Required 1. Discuss these two options and determine the better choice. Ensure that all teammates concur with the decision and understand the rationale. 2. Each member of the team is to prepare one of the following journal entries. a. Option A—at date of issuance. b. Option B—at date of issuance. c. Option A—at maturity date. d. Option B—at maturity date. 3. In rotation, each member is to explain to the team the entry he or she prepared in part 2. Ensure that all team members concur with and understand the entries. 4. Assume that the funds are borrowed on December 1 (instead of June 1) and your business operates on a calendar-year reporting period. Each member of the team is to prepare…arrow_forwardYou are the accounting manager for Kool Ragz, Inc., a manufacturer of men's and women's clothing. The company needs to borrow $1,100,000 for 90 days in order to purchase a large quantity of material at "closeout" prices. The interest rate for such loans at your bank, Rimrock Bank, is 14% using ordinary interest. (a) What is the amount (in $) of interest on this loan? $ (b) After making a few "shopping" calls, you find that Southside National Bank will lend at 14% using exact interest. What is the amount (in $) of interest on this offer? (Round your answer to two decimal places.) (c) So that it can keep your business, Rimrock Bank has offered a loan at 13.5% using ordinary interest. What is the amount (in $) of interest on this offer? $ (d) (Challenge) If Southside National wants to compete with Rimrock's last offer (part c) by charging $1,125 less interest, what rate (as a %), rounded to the nearest hundredths of a percent, must it quote using exact interest?arrow_forwardSantana Rey has consulted with her local banker and is considering financing an expansion of her business by obtaining a long-term bank loan. Selected account balances at March 31, 2022, for Business Solutions follow. Total assets $120,268 Total liabilities $875 Total equity $119,393 The bank has offered a long-term secured note to Business Solutions. The bank’s loan procedures require that a client’s debt-to-equity ratio not exceed 0.8. As of March 31, 2022, what is the maximum amount that Business Solutions could borrow from this bank? Assume Business Solutions borrows the maximum amount allowed from the bank. What percentage of assets would be financed by debt? What percentage of assets would be financed by equity?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education
Financial instruments products; Author: fi-compass;https://www.youtube.com/watch?v=gvxozM3TUIg;License: Standard Youtube License