Question

Problem 16-17 Bank Financing 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): Cash $100 Accounts payable $600 Accounts receivable 300 Bank loans 700 Inventory 1,400 Accruals 200    Current assets $1,800    Current liabilities $1,500 Land and buildings 600 Mortgage on real estate 700 Equipment 600 Common stock, $0.10 par 300 Retained earnings 500 Total assets $3,000 Total liabilities and equity $3,000 How much bank financing is needed to eliminate the past-due accounts payable? Round your answer to the nearest dollar. $    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 one month? (Assume there are 30 days in a month.) Round your answer to the nearest dollar. Do not round intermediate calculations. $    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. Do not round intermediate calculations. What is the total loan amount? Round your answer to the nearest dollar. $    What are the monthly installments? Round your answer to the nearest dollar. $    What is the APR of the loan? Round your answer to two decimal places. % What is the effective rate of the loan? Round your answer to two decimal places. % Would you, as a bank loan officer, make this loan? -Select-YesNoItem 7

Answer 1

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