4. sally just purchased a home and took out a 30-year fixed, $205,000 mortgage with an interest...

4. sally just purchased a home and took out a 30-year fixed, $205,000 mortgage with an interest rate of 4.5% and monthly payments.

a. How much is sallys monthlymortgage payment?

b. What percentageof all payments made during the first 3 years will be applied to principal?

c. Assuming that Sally makes her mortgage payments as calculated in part a and decides to refinance her mortgage for a better interest rate after 5 years; what is the balance on her mortgage after 5 years?

d. Sally is able to obtain a new interest rate of 3.85% as she refinances her mortgage; using the balance you just found for part c and the assumption of a new 30-year fixed mortgage; what will Sallys new monthly paymentsbe?

5. Mike in the process of tightening its credit policies to reduce its days sales outstanding (DSO). Mike currently has $1,500,000 in accounts receivable, with a DSO of 50 days. The industry average DSO is 30 days. Mikes CFO does recognize that in tightening credit policies and pressuring customers to pay on time the firm will experience a drop in sales of approximately 8%.

a. What will Mikes level of accounts receivable be following the proposed changes above?

b. Briefly explain why this change in accounts receivable management policy may or may not be worth the loss in sales that Mikes Inc. would experience.

Expert Solution

4. a. Sally's monthly interest rate = 4.5/12 = 0.375%
The month term of the loan = 30 years x 12 months = 360 months

The monthly payment = 205000 x 0.00375(1+0.00375)360/(1+0.00375)360-1
= 1038.70

b. Amortization schedule

Month	Interest paid	Principal Paid	Remaining Balance
			205000
1	768.75	269.95	204730.05
2	767.74	270.96	204459.09
3	766.72	271.98	204187.11
4	765.70	273.00	203914.11
5	764.68	274.02	203640.09
6	763.65	275.05	203365.04
7	762.62	276.08	203088.96
8	761.58	277.12	202811.84
9	760.54	278.16	202533.69
10	759.50	279.20	202254.49
11	758.45	280.25	201974.24
12	757.40	281.30	201692.95
13	756.35	282.35	201410.59
14	755.29	283.41	201127.18
15	754.23	284.47	200842.71
16	753.16	285.54	200557.17
17	752.09	286.61	200270.56
18	751.01	287.69	199982.87
19	749.94	288.76	199694.11
20	748.85	289.85	199404.26
21	747.77	290.93	199113.33
22	746.67	292.03	198821.30
23	745.58	293.12	198528.18
24	744.48	294.22	198233.96
25	743.38	295.32	197938.64
26	742.27	296.43	197642.21
27	741.16	297.54	197344.67
28	740.04	298.66	197046.01
29	738.92	299.78	196746.24
30	737.80	300.90	196445.33
31	736.67	302.03	196143.30
32	735.54	303.16	195840.14
33	734.40	304.30	195535.84
34	733.26	305.44	195230.40
35	732.11	306.59	194923.82
36	730.96	307.74	194616.08
	27009.28	10383.92

Principal paid after 3 years = $10383.92, which is equal to 27% of all the payments made during 3 years

c. Balance after 5 years

Month	Interest paid	Principal Paid	Remaining Balance
			205000
1	768.75	269.95	204730.05
2	767.74	270.96	204459.09
3	766.72	271.98	204187.11
4	765.70	273.00	203914.11
5	764.68	274.02	203640.09
6	763.65	275.05	203365.04
7	762.62	276.08	203088.96
8	761.58	277.12	202811.84
9	760.54	278.16	202533.69
10	759.50	279.20	202254.49
11	758.45	280.25	201974.24
12	757.40	281.30	201692.95
13	756.35	282.35	201410.59
14	755.29	283.41	201127.18
15	754.23	284.47	200842.71
16	753.16	285.54	200557.17
17	752.09	286.61	200270.56
18	751.01	287.69	199982.87
19	749.94	288.76	199694.11
20	748.85	289.85	199404.26
21	747.77	290.93	199113.33
22	746.67	292.03	198821.30
23	745.58	293.12	198528.18
24	744.48	294.22	198233.96
25	743.38	295.32	197938.64
26	742.27	296.43	197642.21
27	741.16	297.54	197344.67
28	740.04	298.66	197046.01
29	738.92	299.78	196746.24
30	737.80	300.90	196445.33
31	736.67	302.03	196143.30
32	735.54	303.16	195840.14
33	734.40	304.30	195535.84
34	733.26	305.44	195230.40
35	732.11	306.59	194923.82
36	730.96	307.74	194616.08
37	729.81	308.89	194307.19
38	728.65	310.05	193997.14
39	727.49	311.21	193685.93
40	726.32	312.38	193373.55
41	725.15	313.55	193060.00
42	723.98	314.72	192745.28
43	722.79	315.91	192429.37
44	721.61	317.09	192112.28
45	720.42	318.28	191794.01
46	719.23	319.47	191474.53
47	718.03	320.67	191153.86
48	716.83	321.87	190831.99
49	715.62	323.08	190508.91
50	714.41	324.29	190184.62
51	713.19	325.51	189859.11
52	711.97	326.73	189532.38
53	710.75	327.95	189204.43
54	709.52	329.18	188875.24
55	708.28	330.42	188544.83
56	707.04	331.66	188213.17
57	705.80	332.90	187880.27
58	704.55	334.15	187546.12
59	703.30	335.40	187210.72
60	702.04	336.66	186874.06

Balance after 5 years = $186874.06

d. new monthly payment
New monthly interest rate = 3.85/12 = 0.3208
Monthly payment = 186874.06 x 0.003208(1+0.003208)360/(1+0.003208)360-1
= $876.04

5. a. After the proposed change the sales will drop by 8%

Sales in current situation = 1500000/50*365 = 10950000

Drop in sales = 10950000 x 8% = 876000

Accounts receivable after this change = (10950000-876000)*30/365 = 828000

b. This change is not worth as Mike is experiencing a drop of $876000 in sales and
is able to collect receivable worth $672000 in excess of current policy.

ekkarill92 answered 1 year ago

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