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Free CMA Exam Braindumps (page: 128)

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A firm often factors its accounts receivable. Its finance company requires a 6% reserve and charges a 1.4% commission on the amount of the receivables. The remaining amount to be advanced is further reduced by an annual interest charge of 15%. What proceeds (rounded to the nearest dollar) will the firm receive from the finance company at the time a $100,000 account due in 60 days is factored?

  1. $92,600
  2. $96,135
  3. $90,285
    D $85,000

Answer(s): C

Explanation:

The factor will withhold $6,000 ($100000 x 6%) as a reserve against returns and allowances and $1,400 ($100,000 x 1.4%) as a commission. The remaining $92,600 will be reduced by interest at the rate of 15% annually. The interest charge should be $2,315, assuming a 360-day year [($92,600 x .15) x (60-day payment period ÷ 360 days)]. The proceeds to be received by the seller equal $90,285 ($92,600 - $2,315)



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On January 1, Scott Corporation received a $300,000 line of credit at an interest rate of 12% from Main Street Bank and drew down the entire amount on February 1. The line of credit agreement requires that an amount equal to 15% of the loan be deposited into a compensating balance account. What is the effective annual cost of credit for this loan arrangement?

  1. 11.00%
  2. 12.00%
  3. 12.94%
  4. 14.12%

Answer(s): D

Explanation:

Annual interest is $36,000 ($300,000 x 12%), and the amount available is $255,000 [$300,000 - ($300,000 x 15%)]. Thus, the effective interest rate is 14.12% ($36,000 ÷ $255,000).



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The Frame Supply Company has just acquired a large account and needs to increase its working capital by $100,000. The controller of the company has identified the four sources of funds given below.
1. Pay a factor to buy the company's receivables, which average $125,000 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 10% and charge a fee of 2% on all receivables purchased. The controller estimates that the firm would save $24,000 in collection expenses over the year. Assume the fee and interest are not deductible in advance.
2. Borrow $110,000 from a bank at 12% interest A 9% compensating balance would be required.
3. Issue $110,000 of 6-month commercial paper to net $100,000 (New paper would be issued every 6 months.)
4. Borrow $125,000 from a bank on a discount basis at 20%. No compensating balance would be required.
Assume a 360-day year in all of your calculations. Assuming a 360-day year and that CyberAge continues paying on the last day of the credit period, the company's weighted-average annual interest rate for trade credit (ignoring the effects of compounding) for these two vendors is

  1. 27.0%
  2. 25.2%
  3. 28.0%
  4. 30.2%

Answer(s): B

Explanation:

If the company pays Web Master within 10 days, it will save $500 ($25,000 x 2%). Thus, the company is effectively paying $500 to retain $24,500 ($25,000 - $500) for 20 days (30 - 10). The annualized interest rate on this borrowing is 36.7346% [($500 ÷ $24,500) x (360 days ÷ 20 days)]. Similarly, the company is, in effect, paying Softidee $2,500 ($50,000 x 5%) to hold $47,500 ($50,000 - $2,500) for 80 days (90 - 10). The annualized rate on this borrowing is 23.6842% [($2,500 ÷ $47,500) x (360 days ÷ 80 days)]. The average amount borrowed from Web Master is $16,333.33 [$24,500 x 1 month x (20 days ÷ 30 days)], and the average amount borrowed from Softidee is $126,666.67 [$47,500 x 3 months x (80 days ÷ 90 days)]. Thus, the weighted average of these two rates based on average borrowings is 25.2% {[($16,333.33 x 36.7346%) + ($126,666.67 x 23.6842%)] ÷ ($16,333.33 + $126,666.67)}. This calculation, however, understates the true cost of not taking the discount because it does not consider the effects of compounding.



View Related Case Study

The Frame Supply Company has just acquired a large account and needs to increase its working capital by $100,000. The controller of the company has identified the four sources of funds given below.
1. Pay a factor to buy the company's receivables, which average $125,000 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 10% and charge a fee of 2% on all receivables purchased. The controller estimates that the firm would save $24,000 in collection expenses over the year. Assume the fee and interest are not deductible in advance.
2. Borrow $110,000 from a bank at 12% interest. A 9% compensating balance would be required.
3. Issue $110,000 of 6-month commercial paper to net $100,000. (New paper would be issued every 6 months.)
4. Borrow $125,000 from a bank on a discount basis at 20%. No compensating balance would be required.
Assume a 360-day year in all of your calculations. Should CyberAge use trade credit and continue paying at the end of the credit period?

  1. Yes, if the cost of alternative short-term financing is less.
  2. Yes, if the firm's weighted-average cost of capital is equal to its weighted-average cost of trade credit.
  3. No, if the cost of alternative long-term financing is greater
  4. Yes, if the cost of alternative short-term financing is greater

Answer(s): D

Explanation:

The company is currently paying an annual rate of 25.2% (see previous question) to obtain trade credit and pay at the end of the credit period. This policy should be continued if trade credit is the only source of financing, or if other sources are available only at a higher rate.






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