ussiged Problem 1 BY: If credit sales for the year are $2,592,000 and accounts r
ID: 2567075 • Letter: U
Question
ussiged Problem 1 BY: If credit sales for the year are $2,592,000 and accounts receivable balance is $252,000 calculate the average collection period. (5 pts) Problem 2 Nessie Corp. has $2,500,000 in current assets ($1,800,000 are permanent current assets, 700,000 are temporary current assets). The company also has $3,000,000 in fixed assets. They believe a conservative financing plan will benefit them in current economic conditions so they will use short-term financing at 7% to finance temporary current assets and they will use long-term financing at 9.5% to finance the rest. Construct a conservative financing plan. Calculate earnings after taxes. (10 points) Problem 3 Which is cheaper: borrow $1,250,000 for two years at 9.5% per year, or use short-term financing and borrow at 6.75% in the first year, and then again borrow at 12.55% in the second year? Calculate total amount of interest expense in both cases before answering. (5pts)Explanation / Answer
Answer 1.
Credit Sales = $2,592,000
Accounts Receivable = $252,000
Average Collection Period = 365 * Accounts Receivable / Credit Sales
Average Collection Period = 365 * $252,000 / $2,592,000
Average Collection Period = 35.49 days
Answer 3.
Option 1:
$1,250,000 borrowed for 2 years at 9.50% per year:
Interest Year 1 = $1,250,000 * 9.50%
Interest Year 1 = $118,750
Interest Year 2 = $1,250,000 * 9.50%
Interest Year 2 = $118,750
Total Interest = 2 * $118,750
Total Interest = $237,500
Option 2:
$1,250,000 borrowed for 2 years at 6.75% the first year and 12.55% in second year:
Interest Year 1 = $1,250,000 * 6.75%
Interest Year 1 = $84,375
Interest Year 2 = $1,250,000 * 12.55%
Interest Year 2 = $156,875
Total Interest = $84,375 + $156,875
Total Interest = $241,250
So, Option 1 should be selected as interest expense is lower than interest expense in Option 2.
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