BFN 110 Lecture Notes - Lecture 29: Accounts Receivable, Promissory Note, Tunxis Community College

76 views2 pages

coralimpala133

6 Jan 2021

School

Tunxis Community College

Department

Business – Finance

Course

BFN 110

Professor

garside

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

Demand loans: are payable (or can be advanced) as desired and the interest rate fluctuates with prime. Prime rate: the interest rate charged to a bank"s best customers. Acts as a benchmark for calculating other interest rates. Fees and compensating balances: in addition to interest, banks often charge set-up fees and administration or review fees. Often banks require that business customers maintain a minimum average account balance in chequing accounts; a compensating balances c (expressed as a decimal) the compensating balance increases the interest cost. When a bank deducts the interest on the loan in advance and lends the balance. Calls for a series of equal payments over the life of the loan. E. g most car loans and home mortgages. When a compensating balance is required as part of the loan. A short-term unsecured promissory note usually in denominations of ,000.

Related Questions

Use two decimal places in your answers ( please show work )

1. A firm plans to issue $5,000,000 of commercial paper for 30 days. A dealer will issue the paper at $4,985,000 at a fee of $2,000 in advance. What is the effective annual rate?

2. A firm has agreed to borrow $750,000 at a simple interest rate of 6% for 30 days to meet its short-term funding needs. The bank charges a loan processing fee of $1,000. What is the effective annual rate on this loan?

3. Assume a trade creditor offers you terms of 2/10 net 40. a. What is the effective annual cost of forgoing the discount? b. If the firm=s bank charges 14% on loans, would you take the trade credit discount?

4. A firm has established a revolving line of credit for $900,000 with a bank at a rate of prime plus 2%. There is an annual fee of 1/2% on any unused funds. Interest is discounted on loans. Prime was 5% when the agreement was made. Assume the firm decides to take down the line for $500,000 for 60 days when the prime is at 6%. What is the effective annual rate?

5. A firm has $500,000 in accounts receivable. A commercial bank will accept these accounts receivable as collateral and will advance the firm 75% of the accounts receivable amount on loan at 6%. The bank charges a $5,000 credit checking fee. The firm will use the agreement for 90 days. What is the effective annual rate?

6. A firm needs full use of $2,000,000 to purchase a new machine. A bank has agreed to loan at 9% discounted interest for 180 days. The bank requires a .25% compensating balance. The bank charges fees in advance of $300. a. How much will the firm need to borrow? b. What will be the effective annual rate on the loan?

7. A firm has $900,000 in inventory qualifying for a short-term loan with a warehouse receipt. A commercial bank will accept this warehousing agreement and inventory as collateral and will advance 80% of the value of the inventory on loan at 6%. The bank charges $5,000 upfront for the agreement. The firm will use the borrowing for 60 days. What is the effective annual rate on the borrowing?

Skip Stephens recently graduated from college with a degree Ibusiness administration. While attending college, Skip built up alarge amount of debt, which currently includes student loans,outstanding credit card balances, bank loans, and so forth. Nowthat he has a good-paying job, Skip wants to clean up his debtposition to improve his credit reputation so that he can qualifyfor a mortgage when he is ready to purchase a house in a fewyears.

As a result of a conversation with a financial planner, Skipdecided that he should consolidate his debt into a single loan.Consolidation will help him monitor his debt better as he pays itoff, and such an action probably will also decrease the interestrate that he is now paying. It took some effort, but Skip was ableto find a financial institution that seems willing to offer him thetype of loan he needs. The firm, which is named Syndicated Lending,is a new firm that specializes in loans to riskier borrowers, so itappears to be the right fit for Skip. Much of Syndicatedâs businessis conducted electronically via the Internet. Although the companyhas a Website that gives some information about loans thatSyndicated offers, there is not much information about interestrates, application fees, and other charges associated with gettinga loan. When Skip clicked on the âInterest Rateâ icon onSyndicatedâs Website, a message appeared that said to contact thecompany directly. After many attempts, Skip was able to speak to aârealâ person at Syndicated. When he asked why more information wasnot available on the Website, the employee stated that the companydecided not to post interest rates because managers believed it wasunfair to publicize low rates to lure customers, knowing that mostborrowers are unable to qualify for such loans. In other words,managers felt that it was unethical to use the âbait andswitchâ¹ tactics used by competitors. The employee gaveSkip some general information about the loans that Syndicatedoffers, but she would not tell him interest rates because thecompany had a policy of not quoting a rate until a thorough creditcheck was completed. As a result, to get an interest quote, Skipwould have to fill out and submit a loan application and he wouldhave to pay a $100 application/credit check fee.

Skip decided that he wanted more information about Syndicatedbefore deciding whether to apply for a loan, so he talked withpeople in the local area, searched chat boards and consumer opinionWebsites on the Internet, and so forth. Although much of theinformation he collected was positive, many people complained thatSyndicated was a âshadyâ organization that has a reputation ofchanging interest rates without notice and that it is not acustomer-friendly firm. Some of the people whom Skip talked withwent so far as to call Syndicated an unethical âloan sharkâ thatcould get away with unannounced interest rate hikes and otherchanges in loan agreements because the company knows that itscustomers cannot borrow from any other financial institution in thelocal area.

Now Skip is wondering whether it is wise to apply for aconsolidated loan from Syndicated, even though it appears that hecan improve his credit rating and lower his interest payments. Whatshould Skip do? Does it seem as though Syndicated follows unethicallending practices? Is it unethical to use âbait and switchâ tacticslike those that Syndicated accuses other institutions of using?Should interest rates be posted on the companyâs Website?

apricotfly173

QUESTION 1

Flexibility of the source of financing. ____ tends to require fewer specific asset restrictions, while _____ tends to require fewer enterprise restrictions.

	a.	Leases; loans
	b.	Leases, leases
	c.	Loans; loans
	d.	Loans, leases

QUESTION 2

_____ is not really buying on credit, whereas _____ is generally free financing for a specified period of time.

	a.	Cash on delivery, cash in advance.
	b.	Cash in advance; net 30
	c.	Net 30, cash in advance
	d.	Net 30; 1/15 net 40

QUESTION 3

_____ is often used by manufacturers to significantly lower their production cost. It gives them the ability to produce in a level production mode year round, rather than running two or three shifts at the peak of their demand cycle.

	a.	Consignment
	b.	Net cash, bill to bill
	c.	Seasonal dating
	d.	Cash in advance

QUESTION 4

A firm is offered credit terms of 1.5/10, net 40. What would be the cost to this firm of using its vendor as its banker?

	a.	18.53%
	b.	18.25%
	c.	13.90%
	d.	17.63%

QUESTION 5

A company estimates its cost of vendor financing (using its vendor as its banker) is 12.2%. It also estimates its effective cost of bank financing to be 9.1%. Which statement best describes this situation?

	a.	Can't say for sure what the better funding source would be.
	b.	The vendor offers less expensive financing and should be used instead of the bank for that reason.
	c.	The company should use its vendor as its financing source, not its bank.
	d.	The company should borrow from its bank and take advantage of the trade discount being offered.

QUESTION 6

A company is offered purchase terms of 2/10, net 40. If it can borrow from its bank for 8%, how long would it need to wait to pay its supplier to bring the cost of vendor financing down to 8%, making it a matter of indifference which financing source was used. I.e., instead of paying in 40 days, when would it pay to reduce the cost of vendor financing to 8%, assuming the vendor would permit it?

	a.	83 days
	b.	93 days
	c.	103 days
	d.	113 days

QUESTION 7

What is the effective cost of bank financing if the loan amount is $100,000, interest is discounted (advance), a 1% commitment fee is paid up front, and a 9% compensating balance is required? The stated interest rate is 8%.

	a.	8.00%
	b.	8.98%
	c.	10.98%
	d.	9.98%

QUESTION 8

Floor planning is best described as:

	a.	Consignment with interest
	b.	Seasonal dating
	c.	Consignment
	d.	Receivables financing

QUESTION 9

Coverage ratios as covenants are calculated using values from the _________. Current ratios as covenants are calculated using values from the ______.

	a.	Income statement and balance sheet; balance sheet
	b.	Income statement; balance sheet
	c.	Balance sheet; balance sheet
	d.	Income statement; income statement and balance sheet

QUESTION 10

_____________ as a source of short-term financing, is described as spontaneous financing.

	a.	Long-term debt
	b.	Commercial paper
	c.	Bank loans
	d.	Trade credit

BFN 110 Lecture Notes - Lecture 29: Accounts Receivable, Promissory Note, Tunxis Community College

Document Summary

Get access

Related Documents

Business Administration - Accounting & Financial Planning FIN401 Lecture Notes - Lecture 8: Effective Interest Rate, Commercial Paper

MGMT 3320 Chapter Notes - Chapter 8: Deflation, Eurocurrency, Futures Contract

FIN 701 Study Guide - Libor, Prime Rate, Credit Risk

Related Questions