Problem 16-17 Bank Financing The Raattama Corporation had sales of $3.4 million

Question

Problem 16-17
Bank Financing

The Raattama Corporation had sales of $3.4 million last year, and it earned a 5% return (after taxes) on sales. Recently, the company has fallen behind in its accounts payable. Although its terms of purchase are net 30 days, its accounts payable represent 61 days' purchases. The company's treasurer is seeking to increase bank borrowing in order to become current in meeting its trade obligations (that is, to have 30 days' payables outstanding). The company's balance sheet is as follows (in thousands of dollars):

How much bank financing is needed to eliminate the past-due accounts payable? Round your answer to the nearest dollar.
$   

Assume that the bank will lend the firm the amount calculated in Part a. The terms of the loan offered are 7%, simple interest, and the bank uses a 360-day year for the interest calculation. What is the interest charge for one month? (Assume there are 30 days in a month.) Round your answer to the nearest dollar. Do not round intermediate calculations.
$   

Now ignore Part b and assume that the bank will lend the firm the amount calculated in Part a. The terms of the loan are 7.5%, add-on interest, to be repaid in 12 monthly installments. Do not round intermediate calculations.
< >What is the total loan amount? Round your answer to the nearest dollar.
$   

What are the monthly installments? Round your answer to the nearest dollar.
$   

What is the APR of the loan? Round your answer to two decimal places.
%

What is the effective rate of the loan? Round your answer to two decimal places.
%Would you, as a bank loan officer, make this loan?
-Select-YesNoItem 7

Cash $100 Accounts payable $600 Accounts receivable 300 Bank loans 700 Inventory 1,400 Accruals 200    Current assets $1,800    Current liabilities $1,500 Land and buildings 600 Mortgage on real estate 700 Equipment 600 Common stock, $0.10 par 300       Retained earnings 500 Total assets $3,000 Total liabilities and equity $3,000

Explanation / Answer

a 61 days purchases     600,000.00 Net 30 days purchases (600/61*30) (295,081.97) Net overdue     304,918.03 Note: In the absence of any information, it is assumed that the cash balance will be required for day-to-day operations and not be used for pay off payable balances. b Interest rate for 1 month Formula = 304918.03*7%*30/360          1,778.69 c Principal amount     304,918.03 Add-on interest@7.5%, annual        22,868.85 Total loan amount     327,786.89 d Monthly instalments (327786.89/12)        27,315.57

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