16-17 Bank Financin-Challenging Problem The Raattama Corporation had sales of $3
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Question
16-17 Bank Financin-Challenging Problem
The Raattama Corporation had sales of $3.5 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 represents 60 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
a. How much bank financing is needed to eliminate the past due accounts payable?---Answer is $300,000 show all work and formulas to support answer
b. 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 calculations. What is the interest charge for 1 month ? Assume there are 30 days in a month.--Answer is $2,000--show all work and formulas to support answers
c. 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
1. What is the total loan amount?--Answer is $322,500--
2. What are the monthly installments?--Answer is $26,875
3. What is the APR of the loan?--Answer is 13.57%
4. What is the effective rate of the loan?--Answer is 14.44%
d. Would you as a bank loan officer make this loan? Why or why not.
Show all work and formulas to support answers
Explanation / Answer
a) Amount of Finance Needed :
Account payable = $600000
as per question Account payable is Equal to 60 Days purchase and through Bank financing they want to reduce it equilent to 30 days purchase
Account payable = $600000 = Equilent to 60 days purchase
hence bank Financing = 30 days financing = $600000/60*30 = $300000
b) Amount of Finance = $30000
Rate o Interest = 8% for 360 days means 8% p.a.
Interest for 1 Month = $300000*8%*1/12 = $2000 Per Month
c) Add on interest is a term where bank calculate loan interest at the begining of the loan and added into principal then brrower simpaly pays this total amount into installments.
Amount of loan = $300000, ROI ( rate of Interest ) = 7.5%
Total Interest Amount = $300000*7.5%*12/12 = $22500
hence, total Loan Amount = $300000 + $22500 = $322500
2) Monthlly Installment = $322500/12 = $26875 per month
3) APR is basically higher then Interest rate because its consider other charges charged by a bank or financial institution i.e Closing charges, other charges, Insurance cost etc.
but in the Question there is no information related to other cost hence APR is equal to normal Interest rate i.e 7.5%
4) Efective rate of Interest : (1 + i/n)n - 1
R = ( 1 + 7.5%/12)12 - 1
R = ( 1.00625)12 - 1 = 0.08436 , 8.43%
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