No More Books Corporation has an agreement with Floyd Bank, whereby the bankhandles $5.2 million in collections a day and requires a $520,000 compensatingbalance. No More Books is contemplating canceling the agreement and dividing itseastern region so that two other banks will handle its business. Banks A and B will eachhandle $2.6 million of collections a day, and each requires a compensating balance of$275,000. No More Books' financial management expects that collections will beaccelerated by one day if the eastern region is divided.a. What is the NPV of accepting the system? (Do not round intermediate calculationsand enter your answer in dollars, not millions of dollars, rounded to the nearestwhole number, e.g., 1,234,567.)b. Whatwill be the annual net savings? Assume that the T-bill rateis 2.5 percent annually. (Do not round intermediate calculations and enter youranswer in dollars, not millions of dollars, rounded to the nearest whole number,e.g., 1,234,567.)× Answer is complete but not entirely correct.a. NPV$5,140,000b. Annual net savings$133,640 x

Question 1a:The collection of $ 5.2 million= $ 5,200,000 is advanced by one day. Incremental…

Answered: No More Books Corporation has an…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Bulldogs Inc. enters into an agreement with a firm that will factor the company’s accounts receivable. The factor agrees to buy the company’s receivables, which average P100,000 per month and have an average collection period of 30 days. The factor will advance up to 80% of the face value of receivables at an annual rate of 10% and a charge fee of 2% on all receivables purchased. The controller of the company estimates that the company would save P18,000 in collection expenses over the year. Fees and interest are not deducted in advance. Assuming a 360-day year, what is the annual cost of financing? a. 12% b. 17.5% c. 10% d. 14%
(Related to Checkpoint 18.2) (Estimating the cost of bank credit) Paymaster Enterprises has arranged to finance its seasonal working-capital needs with a short-term bank loan. The loan will carry a rate of 16 percent per annum with interest paid in advance (discounted). In addition, Paymaster must maintain a minimum demand deposit with the bank of 7 percent of the loan balance throughout the term of the loan. If Paymaster plans to borrow $110,000 for a period of 6 months, what is the annualized cost of the bank loan?
Jamboo Corporation is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $230009 if credit is extended. Of the new accounts receivable generated, 10 percent will prove to be uncollectible. Additional collection costs will be 5 percent of sales, and production and selling costs will be 75 percent of sales. The firm needs to pay 1,500 tax on additional sales. Compute Net income after tax. ANSWER FORMAT: 1234.56 Answer:
When firms enter into loan agreements with their bank, it is very common for the agreement to have a restriction on the minimum current ratio the firm has to maintain. So, it is important that the firm be aware of the effects of their decisions on the current ratio. Consider the situation of Advanced Autoparts (AAP) in 2009. The firm had total current assets of $1,907,570,000 and current liabilities of $1,362,550,000. a. What is the firm's current ratio? b. If the firm were to expand its investment in inventory and finance the expansion by increasing accounts payable, how much could it increase its inventory without reducing the current ratio below 1.2? c. If the company needed to raise its current ratio to 1.5 by reducing its investment in current assets and simultaneously reducing accounts payable and short-term debt, how much would it have to reduce current assets to accomplish this goal? Question content area bottom Part 1 a. What is the firm's…
A firm has arranged for a lockbox system to reduce collection time of accounts receivable. Currently the firm has an average collection period of 43 days, an average age of inventory of 50 days, and an average payment period of 10 days. The lockbox system will reduce the average collection period by three days by reducing processing, mail, and clearing float. The firm has total annual outlays of $15,000,000 and currently pays 9 percent for its negotiated financing. A. Calculate the cash conversion cycle before the lockbox system B. Calculate the cash conversion cycle after the lockbox system C.
Summit Record Company is negotiating with two banks for a $122,000 loan. Fidelity Bank requires a compensating balance of 20 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a compensating balance of 10 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 9 percent. Compensating balances will be subtracted from the $122,000 in determining the available funds in part a. a-1. Calculate the effective interest rate for Fidelity Bank and Southwest Bank. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Fidelity Bank Southwest Bank a-2. Which loan should Summit accept? Southwest Bank O Fidelity Bank Effective Rate of Interest b. Recompute the effective cost of interest, assuming that Summit ordinarily maintains $24,400 at each bank in deposits that will serve as compensating balances. (Do not round intermediate…
New-Markups Department Store has annual credit sales of $ 300 million. John Harris, the collection manager, has estimated that it takes 10 days for a mailed payment to be credited to Newman’s account and that this time can be cut to 5 days if Newman opens up a lockbox account with a local bank. The account in which the checks are placed earns 8.4% annually. The lockbox agreement calls for a monthly payment of $1,350 and, in addition, a monthly charge of $0.06 per check. Newman’s currently processes 120,000 checks monthly. (Treat these expenses as if they occur at the beginning of the year.) a) What are Newman’s daily sales (assuming a 360-day year) b) By how much will Newman’s average bank balance increase if it adopts the lockbox? c) Should Mr Harris adopt the lockbox ? d) Suppose Newman’s has found a regular 20% of its customers account for 80% of credit sales. Should Mr Harris open up the lockbox and use it only for this 20% of the customers?
None
Waterway Industries is a growing company whose ability to raise capital has not been growing as quickly as its expanding assets and sales. Waterway Industries's local banker has indicated that the company cannot increase its borrowing for the foreseeable future. Waterway Industries's suppliers are demanding payment for goods acquired within 30 days of the invoice date, but Waterway Industries's customers are slow in paying for their purchases (60-90 days). As a result, Waterway Industries has a cash flow problem. Waterway Industries needs $147,100 to cover next Friday's payroll. Its balance of outstanding accounts receivable totals $767,100. To alleviate this cash crunch, the company sells $164,200 of its receivables. Record the entry that Waterway Industries would make. (Assume a 2% service charge.) (Credit account titles are automatically indented when amount is entered. Do not indent manually.) Account Titles and Explanation Debit Credit
Beleaguered State Bank (BSB) holds $200,000,000 in deposits and maintains a reserve ratio of 10%, which also is the reserve requirement. On paper, write the T account for BSB and use it to answer the rest of this question. Now suppose that BSB's largest depositor withdraws $10,000,000 from her account one day. On paper, show the effect of this on the T account. How many dollars of cash reserves does BSB need to raise to be allowed to open for business the next morning?
Gerard Appliances, Inc., is a small manufacturer of washing machines and dryers. It sells its products to large, established discount retailers that market the appliances under their own names. Gerard generally sells the appliances on trade credit terms of n/60, but if a customer wants a longer term, it will accept a note with a term of up to nine months. At present, the company is having cash flow troubles and needs $10 million immediately. Its Cash balance is $400,000, its Accounts Receivable balance is $4.6 million, and its Notes Receivable balance is $7.4 million. (a) How might Gerard Appliances use its accounts receivable and notes receivable to raise the cash it needs? (b) What are its prospects for raising the needed cash?
Maris Bank has analyzed the accounts receivable of Anthony Software, Inc. The bank has chosen eight accounts totaling $134,000 that it will accept as collateral. The bank’s terms include a lending rate set at prime 3% and a 2% commission charge. The prime rate currently is 8.5%. Show Solutions and Explanation. A. The bank will adjust the accounts by 10% for returns and allowances. It then will lend up to 85% of the adjusted acceptable collateral. What is the maximum amount that the bank will lend to Anthony Software? (Format: 111,111) B. What is Anthony Software’s effective annual rate of interest if it borrows $100,000 for 12 months? (Note: Assume a 365-day year and a prime rate that remains at 8.5% during the life of the loan.) (Format: 11.1%)

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