Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 21, Problem 16P
The Thompson Corporation projects an increase in sales from $1.5 million to $2 million, but it needs an additional $300,000 of current assets to support this expansion. Thompson can finance the expansion by no longer taking discounts, thus increasing accounts payable. Thompson purchases under terms of 2/10, net 30, but it can delay payment for an additional 35 days—paying in 65 days and thus becoming 35 days past due—without a penalty because its suppliers currently have excess capacity. What is the effective, or equivalent, annual cost of the trade credit?
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The Thompson Corporation projects an increase in sales from $1.5 millionto $2 million, but it needs an additional $300,000 of current assets to support this expansion. Thompson can finance the expansion by no longertaking discounts, thus increasing accounts payable. Thompson purchasesunder terms of 2/10, net 30, but it can delay payment for an additional35 days—paying in 65 days and thus becoming 35 days past due—withouta penalty because its suppliers currently have excess capacity. What is theeffective, or equivalent, annual cost of the trade credit?
Ralston Consulting, Inc., has a $47,000 overdue debt with Supplier No. 1. The company is low on cash, with only $13,160 in the checking account and does not want to borrow any more cash. Supplier No. 1 agrees to settle the account in one of two ways:
Option 1: Pay $13,160 now and $44,650 when some large projects are finished, two years from today.
Option 2: Pay $65,800 three years from today, when even larger projects are finished. Assuming that the only factor in the decision is the cost of money (12%).
(Click here to see present value and future value tables)
A. Calculate the present value of each option. Round your present value factor to three decimal places and final answer to the nearest dollar.
Present value of Option 1
$fill in the blank 1
Present value of Option 2
$fill in the blank 2
B. Which option should Ralston choose?
Ralston Consulting, Inc., has a $40,000 overdue debt with supplier No. 1. The company is low on cash, with only $11,200 in the checking account and does not want to borrow any more cash. Supplier No. 1 agrees to settle the account in one of two ways:
Option 1: Pay $11,200 now and $38,000 when some large projects are finished, two years from today.
Option 2: Pay $56,000 three years from today, when even larger projects are finished. Assuming that the only factor in the decision is the cost of money (10%).
(Click here to see present value and future value tables)
A. Calculate the present value of each option. Round your present value factor to three decimal places and final answer to the nearest dollar.
Present value of Option 1
$
Present value of Option 2
B. Which option should Ralston choose?
Option 1✔
Chapter 21 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 21 - a. Working capital; net working capital; net...Ch. 21 - Prob. 2QCh. 21 - Is it true that, when one firm sells to another on...Ch. 21 - What are the four elements of a firm’s credit...Ch. 21 - Prob. 5QCh. 21 - Prob. 6QCh. 21 - Prob. 7QCh. 21 - Is it true that most firms are able to obtain some...Ch. 21 - What kinds of firms use commercial paper?Ch. 21 - Prob. 1P
Ch. 21 - Medwig Corporation has a DSO of 17 days. The...Ch. 21 - What are the nominal and effective costs of trade...Ch. 21 - A large retailer obtains merchandise under the...Ch. 21 - A chain of appliance stores, APP Corporation,...Ch. 21 - Prob. 6PCh. 21 - Calculate the nominal annual cost of nonfree trade...Ch. 21 - If a firm buys on terms of 3/15, net 45, but...Ch. 21 - Grunewald Industries sells on terms of 2/10, net...Ch. 21 - The D.J. Masson Corporation needs to raise...Ch. 21 - Negus Enterprises has an inventory conversion...Ch. 21 - Strickler Technology is considering changes in its...Ch. 21 - Payne Products had $1.6 million in sales revenues...Ch. 21 - Dorothy Koehl recently leased space in the...Ch. 21 - Suppose a firm makes purchases of $3.65 million...Ch. 21 - The Thompson Corporation projects an increase in...Ch. 21 - The Raattama Corporation had sales of $3.5 million...Ch. 21 - Karen Johnson, CFO for Raucous Roasters (RR), a...Ch. 21 - Prob. 2MCCh. 21 - Prob. 3MCCh. 21 - Prob. 4MCCh. 21 - Prob. 5MCCh. 21 - Prob. 6MCCh. 21 - Prob. 7MCCh. 21 - Prob. 8MCCh. 21 - What is the impact of higher levels of accruals,...Ch. 21 - Prob. 10MCCh. 21 - Prob. 11MCCh. 21 - Prob. 12MCCh. 21 - Prob. 13MCCh. 21 - Prob. 14MCCh. 21 - Prob. 15MCCh. 21 - Prob. 16MC
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