Elizabeth Patrick Financial Management Assignment 3.2 - Chap.

16 Warm Up Exercises

MBA 504:

E16-1. A nursery purchased seeds costing $25K with terms of 3/15 net 30 EOM on January 12. How much will the firm pay if it takes the discount? What is the approximate cost of giving up the cash discount, using the simplified formula? Ans. 25000 (25000x0.03) = 24250 by 27th jan. E16-2. Cleaners Inc. is switching to paying employees every 2 weeks rather than weekly and with therefore skip 1 weeks pay. The firm has 25 employees who work a 60 hour work week and earn an average wage of $12.50/hr. Using a 10% rate of interest, how will this change the firm annually? Ans. Weekly pay = 25 x 60 x 12.5 = $18750 Annually Cleaners Inc pay roll will be = 18750 x (52 26) = $487500 E16-3. Jasmine Scents has been given two competing offers for short term financing. Both offers are for borrowing $15K for 1 year. The first will offer a discount loan at 8%, the 2nd will offer interest to be paid upon maturity at 9%. Calculate the effective annual rates for each loan and indicate which loan offers the better terms. Ans. Offer one Amount to be borrowed = 15000 Discount @ 8% Amount received from loan= 15000 x Present value @ 8 % for 1 year = 15000 x 0.926 =13890 Offer two Amount to be borrowed = 15000 Interest to be paid @ 9% Interest = 15000 x (9/100) =1350 Amount received = 15000 1350 = 13650 Offer one is better and should be accepted

Elizabeth Patrick Financial Management

MBA 504:

E16-4. Jackson Industries has borrowed $125K under a line of credit agreement. While the company normally maintains a checking acct bal. of $15k. in the lending bank, this credit line requires a 20% compensation balance. The stated interest rate on the borrowed funds is 10%. What is the effective annual rate of interest on the line of credit? Ans. Annual interest = (15000/110000) x 100 = 13.64%

Useable amount=125000 15000 = 110000 E16-5. Horizon Telecom sold $300K worth of 120 day commercial paper for $298K. What is the dollar amount of interest paid on the commercial paper? What is the effective 120 day rate on the paper? Ans. Rate = 300-298 x 360 x 100 = 1.999% or 2 % (approx.) 300 120

Amount of interest to be paid = 300 x 2 % x 120/360 = $ 1.99