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Free CMA Exam Braindumps (page: 134)

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PDF with 1336 Questions
View Related Case Study

If a retailer's terms of trade are 3/10, net 45 with a particular supplier, what is the cost on an annual basis of not taking the discount? Assume a 360-day year.

  1. 24.00%
  2. 37.11%
  3. 36.00%
  4. 31.81%

Answer(s): D

Explanation:

If the gross amount of the invoice is $1,000, the buyer will pay $970 [$1,000 x (1 0 - .03)] if (s)he takes the discount. If (s)he does not, (s)he will pay $30 for the use of $970 for up to an additional 35 days. The percentage cost of not taking the discount is the annualized interest rate, that is, the $30 cost divided by the $970 effectively borrowed for 35 days, multiplied by the number of 35-day periods in a 360-dayyear. Thus, the cost of forgoing the discount is 31.81% [($30 ÷ $970) x (360 ÷ 35)].



View Related Case Study

If a firm borrows $590,000 at 10% and is required to maintain $50,000 as a minimum compensating balance at the bank, what is the effective interest rate on the loan?

  1. 10.0%
  2. 11.1%
  3. 9.1%
  4. 12.2%

Answer(s): B

Explanation:

At 10%, the interest on a $500,000 loan is $50,000 per year. However, the $500,000 loan is effectively reduced to $450,000 of usable funds by the compensating balance requirement. Thus, the borrower pays $50,000 of interest for a $450,000 loan, an effective rate of 11.1% ($50,000 - $450,000).



View Related Case Study

Which one of the following statements concerning cash discounts is correct?

  1. The cost of not taking a 2/10, net 30 cash discount is usually less than the prime rate.
  2. With trade terms of 2/15, net 60, if the discount is not taken, the buyer receives 45 days of free credit.
  3. The cost of not taking the discount is higher for terms of 2/10, net 60 than for 2/10, net 30.
  4. The cost of not taking a cash discount is generally higher than the cost of a bank loan.

Answer(s): D

Explanation:

Payments should be made within the discount periods if the cost of not taking discounts exceeds the firm's cost of capital. For example, failing to take a discount when terms are 2/10, net 30 means that the firm is paying an effective annual interest rate exceeding 36%. Thus, the cost of not taking a discount is usually higher than the cost of a bank loan.



View Related Case Study

The Dixon Corporation has an outstanding 1-year bank loan of $300,000 at a stated interest rate of 8% In addition, Dixon is required to maintain a 20% compensating balance in its checking account. Assuming the company would normally maintain a zero balance in its checking account, the effective interest rate on the loan is

  1. 6.4%
  2. 8.0%
  3. 20%
  4. 10.0%

Answer(s): D

Explanation:

The requirement to maintain a compensating balance of 20% of the $300,000 loan means that the borrower has effective use of only 80% of the loan, or $240,000. The 8% interest rate applied to a $300,000 loan requires an annual interest expenditure of $24,000. In turn, paying $24,000 for the use of $240,000 indicates an effective interest rate of 10%.



Page 134 of 336



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