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Free CMA Exam Braindumps (page: 125)

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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 $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

  1. 10.0%
  2. 12.0%
  3. 132%
  4. 16.0%

Answer(s): D

Explanation:

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).



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 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

  1. 9.0%
  2. 12.0%
  3. 13.2%
  4. 21.0%

Answer(s): C

Explanation:

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].



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 $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

  1. 9.1%
  2. 10.0%
  3. 18.2%
  4. 20.0%

Answer(s): D

Explanation:

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).



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. The cost of Alternative 4. to Frame Supply Company is

  1. 20.0%
  2. 25.0%
  3. 40.0%
  4. 50.0%

Answer(s): B

Explanation:

The company will receive $100,000 ($125,000 x 80%) at an annual cost of $25,000, so the annual interest rate is 25% ($25,000 ÷ $100,000).






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