43. Your firm has a line of credit with your local bank for $50,000. The loan ag

Question

43. Your firm has a line of credit with your local bank for $50,000. The loan agreement calls for interest of 9% with a 5% compensating balance requirement which is based on the total amount borrowed. What is the effective interest rate if you need $42,750 for one year to cover your operating expenses?
A. 8.55%
B. 9.00%
C. 9.13%
D. 9.38%
E. 9.47%


45. What is the total opportunity cost for a month based on the firm's current practice?
A. $5.00
B. $18.98
C. $27.92
D. $60.00
E. None of the above.

46. When a firm sells its accounts receivables to a financial institution, it is called:
A. captive financing.
B. collateralization.
C. securitization.
D. legalization.
E. None of the above.

47. Collegiate Tuxedo rents apparel throughout the year. They have experienced non-payment by about 15% of their customers with an average loss of $200. Collegiate wants to stem their losses by using an instant electronic credit check on the customer. These checks will cost them $7 on each of the 1,000 customers. The opportunity cost is 1.5% for the credit period. Should they pursue the credit check?
A. No, because the $7000 cost is too high.
B. No, because a $200 loss is minor.
C. Yes, because the net gain is $30,000.
D. Yes, because the net gain is $23,000.
E. Yes, because the net gain is $193,000.

48. The carrying value of a firm's account receivable is $1,000,000 and the average collection period is 55 days. The firm's credit sales per day are:
A. $33,333.33
B. $18,181.82
C. $1,000,000.00
D. $1,333,333.33
E. None of the above.

Explanation / Answer

(44) Credit Amount = $50,000 Interest Rate = 9% Effective Interest Rate = ? EAR = (1+APR/12)12-1 EAR = (1+ 0.09 / 12)12 – 1 EAR = (1+0.0075)12 – 1 EAR = (1.0075)12 – 1 EAR = 1.093806898 – 1 EAR = 0.09380 (or) 9.38% The right option is (D) 9.38% (45) When a firm sells its accounts receivables to a financial institution, it is called Factoring. Hence, the right option is (E) none of the above Sale of a firm’s accounts receivable to a financial institution known as a factor (48) The Carrying value of a firm’s account receivable = $1,000,000 Average Collection Period = 55 days Credit Sales per day = ? Average collection period = [365 days / Receivables Turnover] 55 days = [365 / Receivables Turnover] Receivables Turnover * 55 days = 365 days Receivables Turnover = [365 / 55] Receivables Turnover = 6.64 times Receivables Turnover = [Sales / Accounts Receivables] 6.64 = [Sales / $1,000,000] $1,000,000 * 6.64 times = Sales Sales = $6,640,000 Credit Sales per day = [$6,640,000 / 365] Credit Sales per day = $18,191.78 (approximately) Hence, the right option is (B) $18,181.82

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