You are in need of regular short term financing to support your business. Three options appear attractive: 1. A standard line of credit in the sum of $500,000 at 18% annual interest for the funds used. You have between $75,000 and $1000,000 in cash coming in in a typical month, and usual monthly expenses of $80,000. At the start of the loan period, you have $120,000 in accounts payable. 2. Your bank is also offering a $1,000,000 5 year loan at 12%, and a requirement to keep $150,000 of that loan in your bank account at all times. You only need to pay the interest each moth, and pay off the million dollar principal at the end of the loan. You have the same revenue and expense profile given above. 3. A factor is also willing to buy your accounts receivable as they come in. They will buy 90% of your receivables at an 80% of fave value. All of your revenue is business-to-business and therefore starts life as A/R. Your customers currently pay on average within 60 days, which the factor knows and expects. Which offer gives you the money you need on an ongoing basis at the lowest cost to the company?

You are in need of regular short term financing to support your business. Three options appear attractive: 1. A standard line of credit in the sum of $500,000 at 18% annual interest for the funds used. You have between $75,000 and $1000,000 in cash coming in in a typical month, and usual monthly expenses of $80,000. At the start of the loan period, you have $120,000 in accounts payable. 2. Your bank is also offering a $1,000,000 5 year loan at 12%, and a requirement to keep $150,000 of that loan in your bank account at all times. You only need to pay the interest each moth, and pay off the million dollar principal at the end of the loan. You have the same revenue and expense profile given above. 3. A factor is also willing to buy your accounts receivable as they come in. They will buy 90% of your receivables at an 80% of fave value. All of your revenue is business-to-business and therefore starts life as A/R. Your customers currently pay on average within 60 days, which the factor knows and expects. Which offer gives you the money you need on an ongoing basis at the lowest cost to the company?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 14P

See similar textbooks

Similar questions

An investor has accumulated $4,450 and is looking for the best rate of return that can be earned over the next year. A bank savings account will pay 9%. A one-year bank certificate of deposit will pay 11%, but the minimum investment is $7,450. Required: a. Calculate the amount of return the investor would earn if the $4,450 were invested for one year at 9%. b. Calculate the net amount of return the investor would earn if $3,000 were borrowed at a cost of 19%, and then $7,450 were invested for one year at 11%. c. Calculate the net rate of return on the investment of $4,450 if the investor accepts the strategy of part b. Note: Round your answer to 2 decimal places. a. Amount of return b. Net amount of return c. Net rate of return %
You are the loan department supervisor for a bank. This installment loan is being paid off early, and it is your task to calculate the rebate fraction, the finance charge rebate (in $), and the payoff for the loan (in $). (Round dollars to the nearest cent.) if the amount financed is = 1,900 number of payments are = 18 the monthly payment is = 125.89 payments made are = 13 slove for rebate fraction, finance charge rebate and the loan payoff
2. You owe $2,000 on a credit card that charges 20% interest. You have $2,200 in your savings account that earns 1.69% interest. Your savings account charges $14.50 a month if you keep a balance of less than $1,500 a month. Compare the amount of interest for both to decide what you should do about paying the credit card bill. Consider all factors in the decision. Show your for any calculations you may completed. In a brief paragraph, justify your decision, including a description of all factors that would affect that decision.
You want to invest $25,000 and are looking for safe investment options. Your bank is offering you a certificate of deposit that pays a nominal rate of 4% that is compounded bimonthly (every two months). What is the effective rate of return that you will earn from this investment? 4.067% 4.188% 3.926% 4.152% Suppose you decide to deposit $25,000 in a savings account that pays a nominal rate of 4%, but interest is compounded daily. Based on a 365-day year, how much would you have in the account after six months? (Hint: To calculate the number of days, divide the number of months by 12 and multiply by 365.) $25,505.01 $26,015.11 $26,397.69 $24,739.86
Today the average undergraduate student is responsible for paying off a $3,500 balance on his/her credit card. Suppose the monthly interest rate is 1.75% (21% APR). How many months will it take to repay the $3,500 balance, assuming monthly payments of $100 are made and no additional expenses are charged to the credit card? [What is the APR on your personal credit card(s)?]
You've worked out a line of credit arrangement that allows you to borrow up to $70 million at any time. The interest rate is .375 percent per month. In addition, 4 percent of the amount that you borrow must be deposited in a noninterest-bearing account. Assume that your bank uses compound interest on its line-of-credit loans. a. What is the effective annual interest rate on this lending arrangement? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.1 b. Suppose you need $25 million today and you repay it in eight months. How much interest will you pay? Note: Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89. a. Effective annual rate b. Total interest paid %
You've worked out a line of credit arrangement that allows you to borrow up to $70 million at any time. The interest rate is .391 percent per month. In addition, 5 percent of the amount that you borrow must be deposited in a noninterest - bearing account. Assume that your bank uses compound interest on its line of credit loans. What is the effective annual interest rate on this lending arrangement? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.1 Suppose you need $15 million today and you repay it in eight months. How much interest will you pay? Note: Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to 2 decimal places, e.g., 1, 234, 567.89.
Find the annual financing cost (AFC) or a 30 day line of credit where the bank requires a 10% compensating balance requirement. Assume you borrow $214,296m at 5.47% and you have $20,000 in the bank.
You have credit card debt of $30,000 that has an APR (monthly compounding) of 18%. Each month you pay the minimum monthly payment. You are required to pay only the outstanding interest. You have received an offer in the mail for an otherwise identical credit card with an APR of 10%. After considering all your alternatives, you decide to switch cards, roll over the outstanding balance on the old card into the new card, and borrow additional money as well. How much can you borrow today on the new card without changing the minimum monthly payment you will be required to pay? (Note: Be careful not to round any intermediate steps less than six decimal places.) You can borrow $ on the new card without changing the minimum monthly payment you will be required to pay. (Round to the nearest dollar.)
You have credit card debt of $25,000 that has an APR (monthly compounding) of 17%. Each month you pay the minimum monthly payment only. You are required to pay only the outstanding interest. You have received an offer in the mail for an otherwise identical credit card with an APR of 12%. After considering all your alternatives, you decide to switch cards, roll over the outstanding balance on the old card into the new card, and borrow additional money as well. How much can you borrow today on the new card without changing the minimum monthly payment you will be required to pay?
You have credit card debt of $25,000 that has an APR (monthly compounding) of 15%. Each month you pay the minimum monthly payment önly. Yourare required to pay only the outstanding interest. You have received an offer in the mail for an otherwise identical credit card with an APR of 12%. After considering all your alternatives, you decide to switch cards, roll over the outstanding balance on the old card into the new card, and borrow additional money as well. How much can be borrowed today on the new card, in total (the irolled over amount plus additional borrowings), without changing the minimum monthly payment you will be required to pay? Note: Make sure all calculations are held to at least five (5) decimal places, The original loan payment is S - (Round to the nearest cent.)
After examining the various personal loan rates available to you, you find that you can borrow funds from a finance company at 9% compounded weekly or from a bank at 10% compounded monthly. Which alternative is more attractive? If you can borrow funds from a finance company at 9% compounded weekly, the EAR for the loan is %