# Cost of Short Term Credit

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Cost of Short Term Credit document sample

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CHAPTER 15 PROBLEMS
WORKING-CAPITAL MANAGEMENT

PROBLEM 15-1
ESTIMATING THE COST OF BANK CREDIT

DATA
Annual interest rate                            12%
Minimum demand dep                              10%
Loan                                        100,000
Months                                            3

Interest =
Effective cost of credit =

PROBLEM 15-2
ESTIMATING THE COST OF COMMERCIAL PAPER

DATA
Paper issue                              20,000,000
Placement fee                               200,000
Maturity                                        270
Interest rate                                   11%

Interest =
Effective cost =

PROBLEM 15-3

A)
2/10, net 30:
Percent                                         2%
Days                                            10
Net                                             30
Effective cost =

B)
3/15, net 30:
Percent                                         3%
Days                                            15

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Net                                    30
Effective cost =

C)
3/15, net 45:
Percent                               3%
Days                                  15
Net                                   45
Effective cost =

D)
2/15, net 60:
Percent                               2%
Days                                  15
Net                                   60
Effective cost =

PROBLEM 15-4
ANNUAL PERCENTAGE RATE

A)
APR =

B)
APR =

C)
APR =

D)
APR =

-100.00%

PROBLEM 15-5
COST OF SHORT-TERM FINANACING

DATA
Needs to borrow                   100,000

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Alternative A:
Interest rate                         14%
Compensating bal                      15%
Min demand dep                     25,000

Amount needed =
Interest =

Rate =

Alternative B:
Total pymt required                116,300

Rate =

B)
Alternative A:
Amount needed =
Interest =
Compensating bal =

Rate =

PROBLEM 15-6
COST OF SHORT-TERM BANK LOAN

DATA
Maximum Loan                       100,000
Int over prime                          1%
Compensating bal                       20%
Prime rate                             12%

A)
Interest =
Compensating bal =

Rate =

B)
Rate =

PROBLEM 15-7

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COST OF COMMERCIAL PAPER

DATA
Amt issued                            500,000
Interest                               10.25%
Cost of issuance                       12,000
Term                                      180

Interest =

Effective Cost =

PROBLEM 15-8
COST OF ACCOUNTS RECEIVABLE

DATA
Needs                                 300,000
Net credit terms                           60
Monthly credit sales                  200,000
A/R balance                           400,000
Over prime                                 2%
Processing charge                          1%
Receivable pledged                    200,000
Face value lent                           75%

A)
prime rate
Interest =

Rate =

B)
Over prime
Compensating balance
Compensating bal =

Interest =

Rate =

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PROBLEM 15-9
COST OF FACTORING

DATA
Credit sales                        400,000
Receivables balance                 800,000
Term                                     60
Less: interest                       1.50%
Reduction in costs                    1,500
Factoring fee                            1%
Reserve                                  9%

Face Value of Rec
(2 months)
Less: Factoring fee
Reserve
Interest

Rate =

PROBLEM 15-10
COST OF SECURED SHORT-TERM CREDIT

DATA
Alternative A:
Loan                               500,000
Fee                                     1%
Interest                               11%
Avg receivables                  1,000,000
Months                                   3

A/R =
Fee =
Interest cost =

Rate =

Alternative B

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Loan
Interest
Warehouse
Warehousing cost =
Interest cost =

Rate =

PROBLEM 15-11
COST OF SHORT-TERM FINANCING

DATA
Loan                                   20,000
Interest                                  10%
Months                                      6
A)
Interest =

Rate =

B)
Compensating balance =

Rate =

C)
Rate =

PROBLEM 15-12
COST OF FACTORING

DATA
Avg rec per month                     100,000
Fee                                        2%
Reserve                                   20%
Interest                                  12%
Interest per month                      1.00%

Avg rec=
Less:
Fee =

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Reserve =
Interest =

Rate =

PROBLEM 15-13
COST OF A SHORT-TERM BANK LOAN

A)
Loan amount                              \$240,000
Loan period                                      3 months
Loan rate                                      8%
Compensating balance                          20%
Current bank balance                       \$4,000

Analysis:
Interest cost
Cost of credit

B)
Cost of credit

PROBLEM 15-14
CASH CONVERSION CYCLE

DATA
Jan-03          Jan-03      Jan-03   Jan-03
Sales-Net                                   2,873           3,475       5,296    7,759
Receivables-Total                             411             538         726      903
Accounts Payable                              283             447         466    1,040
Inventories-Total                             220             293         429      251

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Jan-03
12,327
1,486
1,643
233

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