Assuming a 360-day year, the current price of a $100 U.S. Treasury bill due in 180 days on a 6% discount basis is
Answer(s): A
The 6% discount rate is multiplied times the face amount of the Treasury bill to determine the amount of interest the lender will earn. The interest on this Treasury bill is $3 ($100 x 6% x 5 year), thus the purchase price is $97 ($100--$3).
Which of the following responses is not an advantage to a corporation that uses the commercial paper market for short-term financing?
Answer(s): C
Commercial paper is a short-term, unsecured note payable issued in large denominations by major companies with excellent credit ratings. Maturities usually do not exceed 270 days. Commercial paper is a lower cost source of funds than bank loans, and no compensating balance are required. Commercial paper provides a broad and efficient distribution of debt, and costly financing arrangements are avoided. The market is not open to all companies because only major corporations with high credit ratings can participate.
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 advance2. Borrow $110000 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. The cost of Alternative 1. to Frame Supply Company is
Answer(s): D
The factor will advance $100,000 ($125,000 x 80%). This amount is the average balance outstanding throughout the year. Thus, annual interest will be $10,000 ($100,000 x 10%). In addition, the company will pay an annual fee of $30,000 ($125,000 per month x 2% x 12 months), so the total annual net cost is $16,000 ($10,000 ÷ $30,000 - $24,000 savings). Hence, the annual cost is 16% ($16,000 ÷ $100,000 loan).
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 receivable, which average $125,000 per month and have an average collection period of 30 days. The factor will advance u to 80% of the face value of receivables at 10% and charge a fee of 2%.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. The cost of Alternative 2. to Frame Supply Company is
Even though the company will borrow $110,000, it will have use of only $100,100 because a 9% compensating balance, or $9,900, must be maintained at all times. Consequently, the effective annual interest rate is 13.2% [($110,000 x 12%) ÷ $100,100].
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 $125000 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. The cost of Alternative 3. to Frame Supply Company is
By issuing commercial paper, the company will receive $100,000 and repay $110,000 every six months. Thus, for the use of $100,000 in funds, the company pays $10,000 in interest each six-month period, or a total of $20,000 per year. The annual percentage rate is therefore 20% ($20,000 ÷ $100000).
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