Short-Term Financing

1. Bridgeport Inc has a $30 million revolving credit agreement with its bank at prime plus 3.2%
based on a calendar year. Prior to the month of April, it had taken down $15 million that was
outstanding for the entire month. On April 10, it took down another $5 million. Prime is 8.2%, and
the bank's commitment fee is 0.25% annually. Calculate the total charges associated with
Bridgeport's revolving credit agreement for the month of April.
a. $174,167
b. $2,427
c. $176,594
d. $171,740

2. Southport Inc. has an inventory turnover of 10x, a DSO of 45 days, and turns over its payables
once a month. How long is Southport's cash conversion cycle? (Use a 360-day year.)
a. 36 days; 45 days
b. 81 days; 45 days
c. 81 days; 51 days
d. 51 days; 36 days
3. Dexter Instrument Company's sales average $3 million per day. If Dexter could reduce the time
between customers' mailing their payments and the funds' becoming collected balances by 2.5 days,
what would be the increase in the firm's average cash balance?
a. $3.5M
b. $5.5M
c. $6M
d. $7.5M

4. De xter Instrument Company's sales average $3 million per day. Dexter could reduce the time
between customers' mailing their payments and the funds' becoming collected balances by 2.5 days
to increase in the firm's average cash balance. Assuming that these additional funds can be invested
in marketable securities to yield 8.5 percent per year, determine the annual increase in Dexter's
(pretax) earnings.
a. $750,000
b. $637,500
c. $250,000
d. $857,500

5. Miranda Tool Company sells to retail hardware stores on credit terms of "net 30." Annual credit
sales are $18 million and are spread evenly throughout the year. The company's variable cost ratio
is 0.70, and its accounts receivable average $1.9 million. Using this information, determine the
average daily credit sales (assume there are 365 days per year).
a. $49,315
b. $5,205
c. $570,000
d. $46,719

6. Miranda Tool Company sells to retail hardware stores on credit terms of "net 30." Annual credit
sales are $18 million and are spread evenly throughout the year. The company's variable cost ratio
is 0.70, and its accounts receivable average $1.9 million. Assume there are 365 days per year. Using
this information, what is the days sales outstanding?
a. 36.5
b. 38.5
c. 39
d. 45

7. The Milton Company currently purchases an average of $22,000 per day in raw materials on
credit terms of "net 30." The company expects sales to increase substantially next year and
anticipates that its raw material purchases will increase to an average of $25,000 per day. Milton
feels that it may need to finance part of this sales expansion by stretching accounts payable.
Assuming that Milton currently waits until the end of the credit period to pay its raw material
suppliers, what is its current level of trade credit? (Assume a 365-day year when converting from
annual to daily amounts or vice versa.)
a. $750,000
b. $660,000
c. $90,000
d. $364,999

8. The Milton Company purchases an average of $22,000 per day in raw materials on credit terms of
"net 30," and expects sales to increase substantially next year, increasing its raw material purchases
to an average of $25,000 per day. Milton feels that it may need to finance part of this sales
expansion by stretching accounts payable. Assume that Milton currently waits until the end of the
credit period to pay its raw material suppliers, and find its current level of trade credit. (Assume a
365-day year when converting from annual to daily amounts or vice versa.) Now, if Milton stretches
its accounts payable an extra 10 days beyond the due date next year, how much additional shortterm funds (that is, trade credit) will be generated?
a. $340, 000
b. $220,000
c. $250,000
d. $660,000

9. The Pulaski Company has a line of credit with a bank under which it can borrow funds at an 8%
interest rate. The company plans to borrow $100,000 and is required by the bank to maintain a 15%
compensating balance. What is the annual financing cost of the loan if the company currently
maintains $7,000 in its bank account that can be used to meet the compensating balance
requirement. (Assume a 365-day borrowing period.)
a. 7.6%
b. 8.0%
c. 8.7%
d. 9.2%

10. The Pulaski Company has a line of credit with a bank under which it can borrow funds at an 8%
interest rate. The company plans to borrow $100,000 and is required by the bank to maintain a 15%
compensating balance. Determine the annual financing cost of the loan if the company currently has
no funds in its account at the bank that can be used to meet the compensating balance requirement.
(Assume a 365-day borrowing period.)
a. 9.41%
b. 8.50%
c. 17.6%
d. 7.41%

11. Perry Chemicals is in the process of constructing a financial plan for the coming year. It has
estimated that fixed assets will be equal to 200,000,000 for the year and that current asset
requirements vary between a minimum of 50,000,000 and a maximum of 80,000,000 during the
year. What is the amount of permanent assets?
a. 30,000,000
b. 130,000,000
c. 150,000,000
d. 250,000,000

12. Perry Chemicals is in the process of constructing a financial plan for the coming year. It has
estimated that fixed assets will be equal to 200,000,000 for the year and that current asset
requirements vary between a minimum of 50,000,000 and a maximum of 80,000,000 during the
year. What is the amount of maximum temporary assets?
a. 30,000,000
b. 130,000,000
c. 150,000,000
d. 250,000,000

13. What is the nominal annual cost of trade credit given payment terms offering a 3% discount if
payment is received 15 days after purchase or payment in full is due in 45 days (Assume 360 days
per year)?
a. 36%
b. 37.11%
c. 45.03%
d. 30%

14. Rhine River Products is considering changing to a cash management system that would reduce
its mail delay from 3 days to 1 day and totally eliminate its processing delay of 2 days. On average,
the firm collects DM75,000 of credit sales per day. The firm's marginal tax rate is 46%, and its
required rate of return on the system is 15%. What amount of funds would be made available if
Rhine River switched to the proposed system?
a. DM300,000
b. DM18,750
c. DM11,250
d. DM345,000

15. Rhine River Products is considering changing to a cash management system that would reduce
its mail delay from 3 days to 1 day and totally eliminate its processing delay of 2 days. On average,
the firm collects DM75,000 of credit sales per day. The firm's marginal tax rate is 46%, and its
required rate of return on the system is 15%. What compensating balance requirement would the
firm be willing to accept if the system is implemented?
a. DM300,000
b. DM18,750
c. DM11,250
d. DM345,000

16. Pentec Electric is in the process of forecasting accounts receivable. However, the company is
unsure of the amount of credit sales and whether the days sales outstanding will be 30 or 40 days. If
annual credit sales are $45 million, what is the balance in accounts receivable for a DSO of 30 and a
DSO of 40 (Assume 360 days per year)?
a. $3,750,000; $5,000,000
b. $5,000,000; $1,500,000
c. $1,500,000; $1,125,000
d. $5,125,000; $3,750,000

17. Pentec Electric is in the process of forecasting accounts receivable. However, the company is
unsure of the amount of credit sales and whether the days sales outstanding will be 30 or 40 days. If
annual credit sales are $60 million, find the balance in accounts receivable for a DSO of 30 and a
DSO of 40.
a. $3,750,000; $5,000,000
b. $5,000,000; $6,500,000
c. $5,000,000; $6,666,667
d. $5,125,000; $6,666,667

18. In order to attract new customers, Media Technique is considering changing its credit terms from
net 30 to net 60. Currently, Media's days sales outstanding is 40 days and is expected to increase to
70 days if the terms are extended to net 60. The liberal credit period is expected to add
FF30,000,000 in new annual sales to the current sales level of FF150,000,000. What is Media's
current balance in accounts receivable (Assume 360 days per year)?
a. FF120,000,000
b. FF375,000
c. FF16,666,667
d. FF41,666,667

19. In order to attract new customers, Media Technique is considering changing its credit terms from
net 30 to net 60. Currently, Media's days sales outstanding is 40 days and is expected to increase to
70 days if the terms are extended to net 60. The liberal credit period is expected to add
FF30,000,000 in new annual sales to the current sales level of FF150,000,000. What will Media's
balance in accounts receivable be if the longer credit period is made effective (Assume 360 days per
year)?
a. FF35,000,000
b. FF29,166,667
c. FF5,833,333
d. FF10,500,000

THE PROBLEM BANK - SOLUTIONS

Part 6 - Short-Term Financing
Section 1 - Basic
1. Bridgeport Inc has a $30 million revolving credit agreement with its bank at prime plus 3.2%
based on a calendar year. Prior to the month of April, it had taken down $15 million that was
outstanding for the entire month. On April 10, it took down another $5 million. Prime is 8.2%, and
the bank's commitment fee is 0.25% annually. Calculate the total charges associated with
Bridgeport's revolving credit agreement for the month of April.

a.
b.
c.
d.

$174,167
$2,427
$176,594
$171,740

ANSWER: c
SOLUTION:
k = 8.2% + 3.2% = 11.4% => .95% monthly
Annual commitment fee = .25% => .0208% monthly
Outstanding in April: $15M for the whole month
$5M for 2/3 month
Unused balance: $30M - $15M = $15M for 1/3 month
$30M - $15M - $5M = $10M for 2/3 month
Interest: [$15M + (2/3)$5M](.0095) = $174,167
Commitment fee: [(1/3)$15M + (2/3)$10M](.000208) = $2,427
Total Cost: $2,427 + $174,167 = $176,594
KEYSTROKES:

HP

TI

Cost of debt (Kd):

8.2 [+]
3.2 [=]
Solution: 11.40% (yearly)
[ ]
12 [=]
Solution: .95 (monthly)

Cost of debt (Kd):

8.2 [+]
3.2 [=]
Solution: 11.40% (yearly)
[ ]
12 [=]
Solution: .95 (monthly)

Commitment fee:
.25% (yearly) [ ]
12 [=]
Solution: .0208% (monthly)

Commitment fee:
.25% (yearly) [ ]
12 [=]
Solution: .0208% (monthly)

Interest Cost:

Interest Cost:

2[ ]
3 [x]
5,000,000 [+]
15,000,000 [x]
.0095 [=]

2[ ]
3 [x]
5,000,000 [+]
15,000,000 [x]
.0095 [=]

Solution: 174,166.67

Solution: 174,166.67

Commitment fee cost:

Commitment fee cost:

2[ ]
3 [x]
10,000,000 [+] [ '] [ ( ] [ '] [ ( ]
1[ ]
3 [ '] [ ) ] [x]
15,000,000 [ '] [ ) ] [x]
.000208 [=]
Solution: 2,426.67
[+]
174,166.67 [=]

2[ ]
3 [x]
10,000,000 [+] [ ( ] [ ( ]
1[ ]
3 [ ) ] [x]
15,000,000 [ ) ] [x]
.000208 [=]
Solution: 2,426.67
[+]
174,166.67 [=]

Solution: 176,593.34

Solution: 176,593.34

2. Southport Inc. has an inventory turnover of 10x, a DSO of 45 days, and turns over its payables
once a month. How long is Southport's cash conversion cycle? (Use a 360-day year.)

a.
b.
c.
d.

36 days; 45 days
81 days; 45 days
81 days; 51 days
51 days; 36 days

ANSWER: c
SOLUTION:
Inventory Conversion Period = 360/10 = 36 days
Cash conversion Cycle = Inventory Conversion Period + DSO - Payables Deferral Period
= 81 - 30 = 51 days

3. Dexter Instrument Company's sales average $3 million per day. If Dexter could reduce the time
between customers' mailing their payments and the funds' becoming collected balances by 2.5 days,
what would be the increase in the firm's average cash balance?
a.
b.
c.
d.

$3.5M
$5.5M
$6M
$7.5M

ANSWER: d
SOLUTION:
Increase in Avg. Cash Balance = Average Daily Sales x Decrease in Payment Processing Time
= $3,000,000 x 2.5 = $7,500,000
4. Dexter Instrument Company's sales average $3 million per day. Dexter could reduce the time
between customers' mailing their payments and the funds' becoming collected balances by 2.5 days
to increase in the firm's average cash balance. Assuming that these additional funds can be invested

in marketable securities to yield 8.5 percent per year, determine the annual increase in Dexter's
(pretax) earnings.
a.
b.
c.
d.

$750,000
$637,500
$250,000
$857,500

ANSWER: b
SOLUTION:
Increase in Avg. Cash Balance = Average Daily Sales x Decrease in Payment Processing Time
= $3,000,000 x 2.5
= $7,500,000
Annual Increase in (Pre-tax) Earnings = Increase in Average Cash Balance x Interest Rate
= $7,500,000 x 0.085
= $637,500
5. Miranda Tool Company sells to retail hardware stores on credit terms of "net 30." Annual credit
sales are $18 million and are spread evenly throughout the year. The company's variable cost ratio
is 0.70, and its accounts receivable average $1.9 million. Using this information, determine the
average daily credit sales (assume there are 365 days per year).
a.
b.
c.
d.

$49,315
$5,205
$570,000
$46,719

ANSWER: a
SOLUTION:
Average daily credit
sales

= Annual Credit
Sales

=
$18,000,000

365

365

=$49,315
6. Miranda Tool Company sells to retail hardware stores on credit terms of "net 30." Annual credit
sales are $18 million and are spread evenly throughout the year. The company's variable cost ratio
is 0.70, and its accounts receivable average $1.9 million. Assume there are 365 days per year. Using
this information, what is the days sales outstanding?
a.
b.
c.
d.

36.5
38.5
39
45

ANSWER: b
SOLUTION:

Average daily
credit sales

= Annual Credit Sales

=
$18,000,000

365

365

=$49,315
Days sales
outstanding

=Accounts receivable balance

Average daily credit sales
=$1,900,000

=38.5 days

$49,315
7. The Milton Company currently purchases an average of $22,000 per day in raw materials on
credit terms of "net 30." The company expects sales to increase substantially next year and
anticipates that its raw material purchases will increase to an average of $25,000 per day. Milton
feels that it may need to finance part of this sales expansion by stretching accounts payable.
Assuming that Milton currently waits until the end of the credit period to pay its raw material
suppliers, what is its current level of trade credit? (Assume a 365-day year when converting from
annual to daily amounts or vice versa.)
a.
b.
c.
d.

$750,000
$660,000
$90,000
$364,999

ANSWER: b
SOLUTION:
Current trade credit (Accounts payable) = Average purchases per day x Credit period
= $22,000/day x 30 days
= $660,000
8. The Milton Company purchases an average of $22,000 per day in raw materials on credit terms of
"net 30," and expects sales to increase substantially next year, increasing its raw material purchases
to an average of $25,000 per day. Milton feels that it may need to finance part of this sales
expansion by stretching accounts payable. Assume that Milton currently waits until the end of the
credit period to pay its raw material suppliers, and find its current level of trade credit. (Assume a
365-day year when converting from annual to daily amounts or vice versa.) Now, if Milton stretches
its accounts payable an extra 10 days beyond the due date next year, how much additional shortterm funds (that is, trade credit) will be generated?

a.
b.
c.
d.

$340,000
$220,000
$250,000
$660,000

ANSWER: a
SOLUTION:
Current trade credit (Accounts payable) = Average purchases per day x Credit period
= $22,000/day x 30 days

= $660,000
Trade credit (Next year) = $25,000/day x 40 days
= $1,000,000
Additional trade credit = $1,000,000 - $660,000 = $340,000
9. The Pulaski Company has a line of credit with a bank under which it can borrow funds at an 8%
interest rate. The company plans to borrow $100,000 and is required by the bank to maintain a 15%
compensating balance. What is the annual financing cost of the loan if the company currently
maintains $7,000 in its bank account that can be used to meet the compensating balance
requirement. (Assume a 365-day borrowing period.)
a.
b.
c.
d.

7.6%
8.0%
8.7%
9.2%

ANSWER: c
SOLUTION:
Interest costs = $100,000 x 0.08 = $8,000
Additional compensating balance = $100,000 x .15 - $7,000
= $8,000
Usable funds = $100,000 - $8,000 = $92,000
Annual financing cost = ($8,000/$92,000) = 8.70%
10. The Pulaski Company has a line of credit with a bank under which it can borrow funds at an 8%
interest rate. The company plans to borrow $100,000 and is required by the bank to maintain a 15%
compensating balance. Determine the annual financing cost of the loan if the company currently has
no funds in its account at the bank that can be used to meet the compensating balance requirement.
(Assume a 365-day borrowing period.)
a.
b.
c.
d.

9.41%
8.50%
17.6%
7.41%

ANSWER: a
SOLUTION:
Interest costs = $100,000 x 0.08 = $8,000
Additional compensating balance = $100,000 x .15 = $15,000
Usable funds = $100,000 - $15,000 = $85,000
Annual financing cost = ($8,000/$85,000) = 9.41%
11. Perry Chemicals is in the process of constructing a financial plan for the coming year. It has
estimated that fixed assets will be equal to 200,000,000 for the year and that current asset
requirements vary between a minimum of 50,000,000 and a maximum of 80,000,000 during the
year. What is the amount of permanent assets?
a.
b.

30,000,000
130,000,000

c.
d.

150,000,000
250,000,000

ANSWER: d
SOLUTION:
Permanent Assets = Fixed Assets + Permanent Current Assets
= 200,000,000 + 50,000,000
= 250,000,000

12. Perry Chemicals is in the process of constructing a financial plan for the coming year. It has
estimated that fixed assets will be equal to 200,000,000 for the year and that current asset
requirements vary between a minimum of 50,000,000 and a maximum of 80,000,000 during the
year. What is the amount of maximum temporary assets?
a.
b.
c.
d.

30,000,000
130,000,000
150,000,000
250,000,000

ANSWER: a
SOLUTION:
Maximum Temporary Assets = Maximum Total Assets - Permanent Assets
= 280,000,000 - 250,000,000
= 30,000,000
13. What is the nominal annual cost of trade credit given payment terms offering a 3% discount if
payment is received 15 days after purchase or payment in full is due in 45 days (Assume 360 days
per year)?
a.
b.
c.
d.

36%
37.11%
45.03%
30%

ANSWER: b
SOLUTION:

14. Rhine River Products is considering changing to a cash management system that would reduce
its mail delay from 3 days to 1 day and totally eliminate its processing delay of 2 days. On average,

the firm collects DM75,000 of credit sales per day. The firm's marginal tax rate is 46%, and its
required rate of return on the system is 15%. What amount of funds would be made available if
Rhine River switched to the proposed system?
a.
b.
c.
d.

DM300,000
DM18,750
DM11,250
DM345,000

ANSWER: a
SOLUTION:
Funds Available R = (DM75,000)(4) = DM300,000
15. Rhine River Products is considering changing to a cash management system that would reduce
its mail delay from 3 days to 1 day and totally eliminate its processing delay of 2 days. On average,
the firm collects DM75,000 of credit sales per day. The firm's marginal tax rate is 46%, and its
required rate of return on the system is 15%. What compensating balance requirement would the
firm be willing to accept if the system is implemented?
a.
b.
c.
d.

DM300,000
DM18,750
DM11,250
DM345,000

ANSWER: a
SOLUTION:
Funds Available R = (DM75,000)(4) = DM300,000
NPV = DM300,000 - Maximum Compensating Balance = 0
Maximum Compensating Balance = DM300,000
16. Pentec Electric is in the process of forecasting accounts receivable. However, the company is
unsure of the amount of credit sales and whether the days sales outstanding will be 30 or 40 days. If
annual credit sales are $45 million, what is the balance in accounts receivable for a DSO of 30 and a
DSO of 40 (Assume 360 days per year)?
a.
b.
c.
d.

$3,750,000; $5,000,000
$5,000,000; $1,500,000
$1,500,000; $1,125,000
$5,125,000; $3,750,000

ANSWER: a
SOLUTION:

17. Pentec Electric is in the process of forecasting accounts receivable. However, the company is
unsure of the amount of credit sales and whether the days sales outstanding will be 30 or 40 days. If
annual credit sales are $60 million, find the balance in accounts receivable for a DSO of 30 and a
DSO of 40.
a.
b.
c.
d.

$3,750,000; $5,000,000
$5,000,000; $6,500,000
$5,000,000; $6,666,667
$5,125,000; $6,666,667

ANSWER: c
SOLUTION:

18. In order to attract new customers, Media Technique is considering changing its credit terms from
net 30 to net 60. Currently, Media's days sales outstanding is 40 days and is expected to increase to
70 days if the terms are extended to net 60. The liberal credit period is expected to add
FF30,000,000 in new annual sales to the current sales level of FF150,000,000. What is Media's
current balance in accounts receivable (Assume 360 days per year)?
a.
b.
c.
d.

FF120,000,000
FF375,000
FF16,666,667
FF41,666,667

ANSWER: c
SOLUTION:

19. In order to attract new customers, Media Technique is considering changing its credit terms from
net 30 to net 60. Currently, Media's days sales outstanding is 40 days and is expected to increase to
70 days if the terms are extended to net 60. The liberal credit period is expected to add
FF30,000,000 in new annual sales to the current sales level of FF150,000,000. What will Media's

balance in accounts receivable be if the longer credit period is made effective (Assume 360 days per
year)?
a.
b.
c.
d.

FF35,000,000
FF29,166,667
FF5,833,333
FF10,500,000

ANSWER: a
SOLUTION:

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