SHORT TERM FINANCING

1. Tristar Corporation purchases $475 worth of merchandise per day from suppliers. The terms of
purchase are net/45, and the company pays on time. How much is Tristar’s accounts payable
balance?

2. Carl Corporation borrows $150,000 from a bank. A 10 percent compensating balance is required.
What is the amount of the compensating balance?

3. Wilson Company borrows $500,000 from the bank and is required to maintain a 15 percent
compensating balance. Further, Wilson has an unused line of credit of $200,000, with a required
11 percent compensating balance. What is the total required compensating balance the firm must
maintain?

4. Charles Corporation borrows $70,000 at 19 percent annual interest. Principal and interest is due
in 1 year. What is the effective interest rate?

5. Assume the same information as in previous Problem, except that interest is deducted in
advance. (a) What is the amount of proceeds the company will receive at the time of the loan? ( b)
What is the effective interest rate?

6. Ajax Corporation is deciding which of two banks to borrow from on a 1-year basis. Bank A
charges an 18 percent interest rate payable at maturity. Bank B charges a 17 percent interest
rate on a discount basis. Which loan is cheaper?

7. Tech Corporation takes out a $70,000 loan having a nominal interest rate of 22 percent payable
at maturity. The required compensating balance is 12 percent. What is the effective interest rate?

8. Assume the same information as in previous Problem except that interest is payable in advance.
What is the effective interest rate?

9. Wilson Corporation has a credit line of $800,000. The compensating balance requirement on
outstanding loans is 14 percent, and 8 percent on the unused credit line. The company borrows
$500,000 at a 20 percent interest rate. (a) What is the required compensating balance? (b) What
is the effective interest rate?

10. Wise Corporation borrows $70,000 payable in 12 monthly installments. The interest rate is 15
percent. (a) What is the average loan balance? (b) What is the effective interest rate?

2nd meeting  28-02-2018

11. Assume the same information as in previous Problem, except that the loan is on a discount basis.
(a) What is the average loan balance? (b) What is the effective interest rate?

12. Boston Corporation’s balance sheet follows:

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 The company has an excellent credit rating and can issue additional commercial paper if it
wishes. Should Boston Corporation issue additional commercial paper?

13. Nelson Corporation issues $800,000 of commercial paper every 3 months at a 16 percent rate.
Each issuance involves a placement cost of $2,000. What is the annual percentage cost of the
commercial paper?

14. Cho Corporation issues $500,000, 20 percent, 120-day commercial paper. However, the funds
are needed for only 90 days. The excess funds can be invested in securities earning 19 percent.
The brokerage fee for the marketable security transaction is 1.0 percent. What is the net cost to
the company for issuing the commercial paper?

15. Johnson Company expects that it will need $600,000 cash for March 20X2. Possible means of
financing are: (a) Establish a 1-year credit line for $600,000. The bank requires a 2 percent
commitment fee. The interest rate is 21 percent. Funds are needed for 30 days. (b) Fail to take a
2/10, net/40 discount on a $600,000 credit purchase. (c) Issue $600,000, 20 percent commercial
paper for 30 days. Which financing strategy should be selected?

16. What is the effect of the following situations on the cost of accounts receivable financing? (a) A
more thorough credit check is undertaken. (b) Receivables are sold without recourse. (c) The
minimum invoice amount for a credit sale is decreased. (d ) Credit standards are tightened.

17. Drake Company is contemplating factoring its accounts receivable. The factor will acquire
$250,000 of the company’s accounts receivable every 2 months. An advance of 75 percent is
given by the factor on receivables at an annual charge of 18 percent. There is a 2 percent factor
fee associated with receivables purchased. What is the cost of the factoring arrangement?

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AFTER MIDTERM

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COST OF CAPITAL

1. Assume that the Carter Company issues a $1,000 8% 20 year bond whose net proceeds are
$940. The tax rate is 40%. Then calculate the cost of debt.

2. Suppose that the Carter company has preferred stock that pays a $13 dividend per share and
sells for $100 per share in the market. The flotation (or underwriting) cost is 3% or $3 per share.
Then calculate the cost of preferred stock.

3. Assume that the market price of the Carter Company’s stock is $40. The dividend to be paid at
the end of the coming year is$4 per share and is expected to grow at a constant annual rate of
6%. Then calculate the cost of common stock.

4. Assume that the same data as in example number 3 except that the firm is trying to sell new
issues of stock A and its flotataion cost is 10%. Then calculate the cost

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 Homework

DIVIDEND POLICY

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