Question
In: Finance
Problem 16-17 Bank Financing The Raattama Corporation had sales of $3.4 million last year, and it...
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Problem 16-17 The Raattama Corporation had sales of $3.4 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 represent 59 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):
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Solutions
Expert Solution
Bank financing
Answer to Part(a)
Amount payable current(59 days purchase)- $600
Target amount payable- 30 days purchase
Hence amount of finance needed to clear past due account payable- (600/59)*30 - $305
Answer to part (b)
Amount of loan provided by bank in part (a)- $305
Interest Rate - 8% simple interest
Interest rate for one month -8%/12 -.67%
Interest amount for one month - $305*.67% =$2.04
Answer to part (c)
(i) Amount of bank finance ( as calculated in part A) =$305
(ii) Calculation of monthly installment =
Interest Rate =7.5% Simple Interest
Monthly Interest Rate(r)= 7.5%/12 =.625%
No of Monthly Installments(n) = 12 installments
PV =305
Use formula
PMT(r,n,PV)
PMT(.625%,12,300)
=$26.03
Hence monthly installments =$26.03
(iii) APR of the loan = 7.5% (as provided in the question
(iv) Effective rate of interest =
=(1+APR/n)^n -1 =.0766 or 7.76%
Answer to part (d)
Being as bank officer, i determine that the amount of net worth of company is negative i.e common stock+ retained earning
=300+-500=-200
Hence as bank officer i am not in a favour of advancing loan to the company
jeff jeffy answered 1 year agoRelated Solutions
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