The Raattama Corporation had sales of $3.0 million last year, and it earned a 5% return (after taxes) on sales. Recently, the co
mpany has fallen behind in its accounts payable. Although its terms of purchase are net 30 days, its accounts payable represent 50 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
How much bank financing is needed to eliminate the past-due accounts payable? Enter your answer as a positive value. Do not round intermediate calculations. Enter your answer in dollars. For example, an answer of $1.23 thousand dollars should be entered as 1,230, not 1.23. 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 8%, simple interest, and the bank uses a 360-day year for the interest calculation. What is the interest charge for 1 month? (Assume there are 30 days in a month.) Enter your answer as a positive value. Do not round intermediate calculations. Enter your answer in dollars. For example, an answer of $1.23 thousand dollars should be entered as 1,230, not 1.23. Round your answer to the nearest dollar.
$
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 7.6%, add-on interest, to be repaid in 12 monthly installments. Enter your answers as positive values. Do not round intermediate calculations.
What is the total loan amount? Enter your answer in dollars. For example, an answer of $1.23 thousand dollars should be entered as 1,230, not 1.23. Round your answer to the nearest dollar.
$
What are the monthly installments? Enter your answer in dollars. For example, an answer of $1.23 thousand dollars should be entered as 1,230, not 1.23. 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? Why or why not?
I. No, because bank borrowings are already high and the liquidity situation is poor.
II. Yes, because bank borrowings are low and the liquidity situation is good.
III. Yes, because net profit is sufficient to cover the monthly installment.
-Select-
