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5. Accounts payable should not be stretched too far because of a possible reduction in the firmâ€™s

6 . A note payable may be payable at or in

7. loans are those in which the loan is paid as soon as the financed assets realize

cash.

8. The rate charged by banks to their best clients is called the interest rate.

loans require no collateral.

9.

10. When a(n) is given, the bank agrees to lend the borrower money on a continual

basis up to a given amount.

11. refers to the deposit, which does not earn interest, that a company must

maintain at the bank as collateral for a loan.

12. In a(n) loan, monthly payments are required.

13. Interest on a loan may be paid at or

SHORT-TERMFINANCING [CHAP. 5

142

interest rate will be higher.

14. When a loan is discounted, the

is a draft drawn by an individual and accepted by the bank requiring future

15.

payment to a third party.

is less than the interest rate on a bank loan.

16. The interest rate on

17. The outright sale of accounts receivable to a third party is called

,accounts receivable are transferred to a third party with recourse.

18. In a(n)

lien applies to the aggregate inventory

19. In the case of inventory financing, a(n)

rather than the components.

loan, the creditor has title to goods but releases them to the borrower to

20. In a(n)

sell on the creditorâ€™s behalE

Answers: (1)1year; (2) interest rate; (3) trade credit; (4) spontaneous; ( 5 ) credit rating; (6) maturity, installments;

(7) Self-liquidating; (8) prime; (9) Unsecured; (10) line of credit; (11)compensating balance; (12) installment; (13)

maturity, in advance; (14) effective; (15) bankersâ€™ acceptance; (16) commercial paper; (17) factoring; (18)

assignment; (19) floating (blanket); (20) trust receipt.

Solved Problems

51

. Accounts Payable. James Corporation purchases $750 per day from suppliers on terms of net/30.

Determine the accounts payable balance.

SOLUTION

$750 per day X 30 days = $22,500

Compensating Balance. Car1 Corporation borrows $150,000 from a bank. A 10 percent

5.2

compensating balance is required. What is the amount of the compensating balance?

SOLUTION

$150,000 X 0.10 = $15,000

Compensating Balance. Wilson Company borrows $500,000 from the bank and is required to

5.3

maintain a 15 percent compensating balance. Further, Wilson has an unused line of credit of

$200,000, with a required 11 percent compensating balance. What is the total required

compensating balance the firm must maintain?

SOLUTION

($500,000 X 0.15)+ ($200,000 X 0.11) = $97,000

5.4 Effective Interest Rate. Charles Corporation borrows $70,000 at 19 percent annual interest.

Principal and interest is due in 1year. What is the effective interest rate?

143

SHORT-TERM FINANCING

CHAP. 51

SOLUTION

The effective interest rate is 19 percent.

Proceeds of Loan. Assume the same information as in Problem 5.4, except that interest is

5.5

deducted in advance. ( a ) What is the amount of proceeds the company will receive at the time

of the loan? ( 6 )What is the effective interest rate?

SOLUTION

Interest = $70,000 X 0.19 = $13,300

(4

Proceeds = principal - interest = $70,000 - $13,300 = $56,700

interest

Effective interest rate = - - 23.5% = $13â€™300 =

proceeds $56,700

Interest Cost. Ajax Corporation is deciding which of two banks to borrow from on a 1-year basis.

5.6

Bank A charges an 18 percent interest rate payable at maturity. Bank B charges a 17 percent

interest rate on a discount basis. Which loan is cheaper?

SOLUTION

Bank A 18%

17%

-= 20.5%

Bank B

83 Yo

Ajax should borrow from bank A since the effective interest rate is lower.

5.7 Effective Interest Rate. Tech Corporation takes out a $70,000loan having a nominal interest rate

of 22 percent payable at maturity. The required compensating balance is 12 percent. What is the

effective interest rate?

SOLUTION

interest rate - - 0.22

0.22

Effective interest rate --=

- 25Yo

=

proceeds, % 1.00 - 0.12 0.88

Effective Interest Rate. Assume the same information as in Problem 5.7 except that interest is

5.8

payable in advance. What is the effective interest rate?

SOLUTION

Effective rate = interest rate -

- 0.22 - 0.22

--= 33.3%

proceeds, % 0.88 - 0.22 0.66

Effective Interest Rate and Compensating Balance. Wilson Corporation has a credit line of

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