QUESTION: 436 Topic 8: Part 1 Sec Eight (410 to 542)

The treasury analyst for Garth Manufacturing has estimated the cash flows for the first half of next year (ignoring any short-term borrowings) as follows:

Garth has a line of creditor unto $4 million on which it pays interest monthly ate rate of 1% of the amount utilized. Garth is expected to have a cash balance of $2 million on January 1 and no amount utilized on its line of credit. Assuming all cash flows occur at the end of the month, approximately how much will Garth pay in interest during the first half of the year?

$O
$61,000
$80,000
$132,000

Answer(s): B

Explanation:

The sum of the beginning balance and inflows exceeds the outflows for the first 2 months. At the end of March, however1 Garth must use $2,000,000 of its line of credit ($2,000,000 beginning balance + $6,000,000 inflows--$10,000,000 outflows). Thus, interest for April is $20,000 ($2,000,000 x 1%). The net cash outflow for April (ignoring short-term borrowings) is $1,000,000 of an additional $1,000,000 of the line of credit. However, the $20,000 of interest for April must also be paid, so the amount of the line of credit used in May is $3,020,000 ($2,000,000 + $1,000,000 + $20,000). Interest for May is therefore $30,200 ($3,020,000 x 1%). Given the net cash inflow for May of $2,000,000 (again ignoring short-term borrowings) and the borrowing of $30,200 to pay the interest for May, the amount of the line of credit used in June is $1,050,200. Interest in June is $10,502 ($1,050,200 x 1%), and total interest is $60,702 ($20,000 + $30,200 + $10,502).
Consequently, the closest answer is $61, 000.

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QUESTION: 437 Topic 8: Part 1 Sec Eight (410 to 542)

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Kemble is a newly established janitorial firm, and the owner is deciding what type of checking account to open. Kemble is planning to keep a $500 minimum balance in the account for emergencies and plans to write roughly 80 checks per month. The bank charges $10 per month plus a $0.10 per check charge for standard business checking account with no minimum balance. Kemble also has the option of a premium business checking account that requires a $2,500 minimum balance but has no monthly fees or per check charges. If Kemble's cost of funds is 10%1 which account should Kemble choose?

Standard account, because the savings is $34 per year.
Premium account, because the savings is $34 per year.
Standard account, because the savings is $16 per year.
Premium account, because the savings is $16 per year.

Answer(s): D

Explanation:

The standard account will cost $10 per month plus $8 in check charges (80 checks x $.10), for a total of $18 per month or $216 per year. The premium account has no check charges, but it will require the depositor to maintain a balance of $2,000 more than desired. At a 10% cost of capital, the incremental $2,000 minimum deposit will cost $200 per year. Thus, the premium account should be selected because it is cheaper by $16 per year.

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QUESTION: 438 Topic 8: Part 1 Sec Eight (410 to 542)

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Newman Products has received proposals from several banks to establish a lockbox system to speed up receipts. Newman receives an average of 700 checks per day averaging $1 .800 each, and its cost of short-term funds is 7% per year. Assuming that all proposals will produce equivalent processing results and using a 360-dayyear, which one of the following proposals is optimal for Newman?

A $0.50 fee per check.
Flatfeet of $125,000 per year.
A fee of 0.03% of the amount collected.
A compensating balance of $1,750,000.

Answer(s): D

Explanation:

Multiplying 700 checks times 360 days results in a total of 252,000 checks per year. Accordingly, under (A). Total annual cost is $126,000 (252,000 x $50), which is less desirable than the $125,000 flat fee in (B). Given that the annual collections equal $453,600,000 (700 checks x $1 .800 x 360 days), (C) is also less desirable because the annual fee would be $136,080 ($453,600,000 x .03%). The best option is therefore to maintain a compensating balance of $1 .750,000 when the cost of funds is 7%, resulting in a total cost of $122,500 ($1,750,000 x.07).

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QUESTION: 439 Topic 8: Part 1 Sec Eight (410 to 542)

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Cleveland Masks and Costumes, Inc. (CMC) has a majority of its customers located in the states of California and Nevada. Keystone National Bank, a major west coast bank, has agreed to provide a Lockbox system to CMC at fixed fee of $50,000 per year and a variable fee of $0.50 for each payment processed by the bank. On average, CMC receives 50 payments per day, each averaging $20,000. With the lockbox system, the company's collection float will decrease by 2 days. The annual interest rate on money market securities is 6%. If CMC makes use of the lockbox system, what would be the net benefit to the company? Use 365 days per year.

$59,125
$60,875
$50,000
$120,000

Answer(s): B

Explanation:

If payments are collected 2 days earlier, the company can earn $120,000 (50 payments per day x 2 days x $20,000 x .06) at a cost of $59,125 [$50,000 + (50 payments x $.50 x 365 days)], a gain of $60,875.

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QUESTION: 436 Topic 8: Part 1 Sec Eight (410 to 542)

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QUESTION: 437 Topic 8: Part 1 Sec Eight (410 to 542)

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QUESTION: 438 Topic 8: Part 1 Sec Eight (410 to 542)

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QUESTION: 439 Topic 8: Part 1 Sec Eight (410 to 542)

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