Question

In: Finance

Charles Smith recently was hired as president of Dellvoe Office Equipment Inc., a small manufacturer of...

Charles Smith recently was hired as president of Dellvoe Office Equipment Inc., a small manufacturer of metal office equipment. As his assistant, you have been asked to review the company’s short-term financing policies and to prepare a report for Smith and the board of directors. To help you get started, Smith has prepared some questions that, when answered, will give him a better idea of the company’s short-term financing policies. In discussing a possible loan with the firm’s banker, Smith found that the bank is willing to lend Dellvoe up to $800,000 for one year at a 9% simple, or quoted, rate. However, he forgot to ask what the specific terms would be.

Now assume that the bank charges simple interest, but it requires the firm to maintain a 20% compensating balance, nad assume also that Dellvoe has $100,000 of cash balances that it normally holds for transactions purposes, which can be used as part of the required compensating balance.

A. How does this affect the size of the required loan?

B. and the EAR of the loan?

Dellvoe is considering using secured short-term financing.

C. What is a secured loan?

D.What two types of current assets can be used to secure loans?

Solutions

Expert Solution

Ans A. Clause of compensating balance imposed by bank effectively reduces the available amount for use to the borrower.

Since, in this case bank has a compensating balance of 20% of %800,000 i.e. $160000 it effectively reduces the available loan amount for use to Dellvoe i.e. Dellvoe can utilize only upto 80% of loan amount i.e. $640000 for their requirement.

Ans B. Since, clause of compensating balance reduces the amount available for borrower use, it increases the EAR.

Assumingly, Dellvoe borrows full $800000, interest charged to Dellvoe is 7% * 800000 i.e. $56000

But available finance amount is only $640000

Hence, EAR = $56000 / $640000 = .0875 or 8.75%

So EAR for Dellvoe increases to 8.75% from 7%

Ans C. A Secured Loan is a loan backed by some asset i.e. a loan for which a collateral is provided to lender. For example, a Mortgage loan or a Loan Against Property are secured loans as property is provided to lender as collateral.

Ans D. Current Assets which can be used to secure loans:

  1. Inventory
  2. Account receivables

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

Charles Smith recently was hired as president of Dellvoe Office Equipment Inc., a small manufacturer of...
Charles Smith recently was hired as president of Dellvoe Office Equipment Inc., a small manufacturer of metal office equipment. As his assistant, you have been asked to review the company’s short-term financing policies and to prepare a report for Smith and the board of directors. To help you get started, Smith has prepared some questions that, when answered, will give him a better idea of the company’s short-term financing policies. What is short-term credit, and what are the four major...
As a recently hired accountant for a small business, SMC, Inc., you are provided with last...
As a recently hired accountant for a small business, SMC, Inc., you are provided with last year’s balance sheet, income statement, and post-closing trial balance to familiarize yourself with the business. You are also given the following information that summarizes the business activity for the current year,2020 As arecently hired accountantfor a smallbusiness,SMC,Inc., you are providedwithlast year’s balance sheet, income statement, and post-closing trial balance to familiarize yourself with the business. SMC, Inc. Balance Sheet December 31, 2019 Assets Cash...
As a recently hired accountant for a small business, SMC, Inc., you are provided with last...
As a recently hired accountant for a small business, SMC, Inc., you are provided with last year’s balance sheet, income statement, and post-closing trial balance to familiarize yourself with the business. SMC, Inc. Balance sheet December 31, 2019 Assets $34,500 Cash $25,000 Accounts receivable $10,000 Supplies $200 Total assets $69,700 Liabilities and stockholders equity Liabilities: Accounts payable $12,000 Salaries payable $1,000 Income taxes payable $3,675 Total liabilities    $16,675 Stockholders equity: Capital stock (10,000 shares outstanding) $25,000 Retained earnings $28,025...
As a recently hired accountant for a small business, SMC, Inc., you are provided with last...
As a recently hired accountant for a small business, SMC, Inc., you are provided with last year’s balance sheet, income statement, and post-closing trial balance to familiarize yourself with the business. SMC, Inc. Balance sheet December 31, 2019 Assets $34,500 Cash $25,000 Accounts receivable $10,000 Supplies $200 Total assets $69,700 Liabilities and stockholders equity Liabilities: Accounts payable $12,000 Salaries payable $1,000 Income taxes payable $3,675 Total liabilities $16,675 Stockholders equity: Capital stock (10,000 shares outstanding) $25,000 Retained earnings $28,025 Total...
As a recently hired accountant for a small business, SMC, Inc., you are provided with last...
As a recently hired accountant for a small business, SMC, Inc., you are provided with last year’s balance sheet, income statement, and post-closing trial balance to familiarize yourself with the business. SMC, Inc. Balance sheet December 31, 2019 Assets $34,500 Cash $25,000 Accounts receivable $10,000 Supplies $200 Total assets $69,700 Liabilities and stockholders equity Liabilities: Accounts payable $12,000 Salaries payable $1,000 Income taxes payable $3,675 Total liabilities $16,675 Stockholders equity: Capital stock (10,000 shares outstanding) $25,000 Retained earnings $28,025 Total...
As a recently hired accountant for a small business, SMC, Inc., you are provided with last...
As a recently hired accountant for a small business, SMC, Inc., you are provided with last year’s balance sheet, income statement, and post-closing trial balance to familiarize yourself with the business. SMC, Inc. Balance Sheet December 31, 2017 Assets Cash ......................................................................................................... $34,500 Accounts receivable ................................................................................ 25,000 Inventory .................................................................................................. 10,000 Supplies ................................................................................................... 200 Total assets.............................................................................................. $69,700 Liabilities and Stockholders’ Equity Liabilities: Accounts payable ............................................................................. $12,000 Salaries payable ............................................................................... 1,000 Income taxes payable ...................................................................... 3,675 Total liabilities.......................................................................................... $16,675 Stockholders’ equity: Capital stock...
As a recently hired accountant for a small business, SMC, Inc., you are provided with last...
As a recently hired accountant for a small business, SMC, Inc., you are provided with last year’s balance sheet, income statement, and post-closing trial balance to familiarize yourself with the business. SMC, Inc. Balance Sheet December 31, 2017 SMC, Inc. Balance Sheet December 31, 2017 Assets Cash .................. $34,500 Accounts receivable ................................................................................ 25,000 Inventory .................................................................................................. 10,000 Supplies ...................................................................................................   200 Total assets.............................................................................................. $69,700 Liabilities and Stockholders’ Equity Liabilities: Accounts payable ............................................................................. $12,000 Salaries payable ............................................................................... 1,000 Income taxes payable ......................................................................    3,675...
Case Study The President of LFC Inc, Jo Rogers, a friend of your family, recently hired...
Case Study The President of LFC Inc, Jo Rogers, a friend of your family, recently hired you as a trainee executive assistant. Your duties include assisting with strategy, budgeting, and year-end accounts. On 1st Dec 2020 at the end of the financial year, Jo calls by your office. S/he greets you with a warm friendly smile and says s/he is pleased with your work so far and can see how you can play an important part in its future expansion....
Ronald was recently hired by Highland Equipment Inc. as a junior budget analyst. He is working...
Ronald was recently hired by Highland Equipment Inc. as a junior budget analyst. He is working for the Venture Capital Division and has been given for capital budgeting projects to evaluate. He must give his analysis and recommendation to the capital budgeting committee. Ronald has a B.S. in accounting from CWU (2016) and passed the CPA exam (2018). He has been in public accounting for several years. During that time he earned an MBA from Seattle U. He would like...
Mary Smith, a CFA candidate, was recently hired for an analyst position at the Bank of...
Mary Smith, a CFA candidate, was recently hired for an analyst position at the Bank of Ireland. Her first assignment is to examine the competitive strategies employed by various French wineries. Smith’s report identifies four wineries that are the major players in the French wine industry. Key characteristics of each are cited in the table below. In the body of Smith’s report, she includes a discussion of the competitive structure of the French wine industry. She notes that over the...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT