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16-17 Bank Financin-Challenging Problem

The Raattama Corporation had sales of $3.5 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 represents 60 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).

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

a. How much bank financing is needed to eliminate the past due accounts payable?---Answer is $300,000 show all work and formulas to support answer

b. Assume that the bank will lend the firm the amount calculated in part a. The terms of the loan offered are 8% simple interest and the bank uses a 360-day year for the interest calculations. What is the interest charge for 1 month ? Assume there are 30 days in a month.--Answer is $2,000--show all work and formulas to support answers

c. 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

1. What is the total loan amount?--Answer is $322,500--

2. What are the monthly installments?--Answer is $26,875

3. What is the APR of the loan?--Answer is 13.57%

4. What is the effective rate of the loan?--Answer is 14.44%

d. Would you as a bank loan officer make this loan? Why or why not.

Show all work and formulas to support answers

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