FAREASTERN UNIVERSITY

MANAGEMENT ADVISORY SERVICES jjaurojrtcbic

Management of Current Liabilities October 2019

Multiple Choice 8. Calculate the annual percentage rate of

foregoing the cash discount if the credit
terms are 1/10, net 40.
1. Accruals and accounts payable are
a. 1.13 percent
_________ sources of short-term
b. 13.0 percent
financing.
c. 20.1 percent
(a)negotiated, secured
d. 11.11 percent
(b)negotiated, unsecured
(c)spontaneous, secured
9. Idaho Industries currently purchases an
(d)spontaneous, unsecured
average of P20,000 per day of raw
materials. Idaho’s suppliers offer credit
2. Financing that arises from the normal
terms of "net 60" and the firm waits until
operations of the firm is said to be
the end of the credit period to pay
(a)expected.
suppliers. Determine Idaho Industries'
(b)accrued.
current level of trade credit (accounts
(c)spontaneous.
payable).
(d)payable.
a. P 20,000
b. P600,000
3. As part of a union negotiation
c. P1,200,000
agreement, the United Clerical Workers
d. P200,000
Union conceded to be paid every two
weeks instead of every week. A major firm
10. Idaho Industries currently purchases
employing hundreds of clerical workers had
an average of P20,000 per day of raw
a weekly payroll of P1,000,000 and the
materials. Idaho’s suppliers offer credit
cost of short-term funds was 12 percent.
terms of "net 60" and the firm waits until
The effect of this concession was to delay
the end of the credit period to pay its
clearing time by one week. Due to the
suppliers. Determine the additional trade
concession, the firm
credit that can be obtained by the firm if
(a)realized an annual loss of P120,000.
Idaho stretches its accounts payable an
(b)realized an annual savings of P120,000.
extra 30 days beyond the due date.
(c)increased its cash cycle.
a. P1,800,000
(d)decreased its cash turnover.
b. P600,000
c. P60,000
4. A floating lien is a loan in which the
d. none of the above
lender receives a security interest or
general claim on all of a company's
11. Melody Dairy has a line of credit with
__________ .
its bank. The firm plans to borrow
a. fixed assets
P400,000 at a rate of 10 percent. The bank
b. assets
requires a 15 percent compensating
c. cash
balance and the firm currently maintains
d. inventory
P20,000 in its account at the bank that can
be used to meet the compensating balance
5. Paying trade credit beyond the end of
requirement. Determine the annual
the credit period is known as
financing cost to Melody of this loan.
a. playing the float
a. 11.1%
b. seasonal datings
b. 10.0%
c. stretching payables
c. 11.8%
d. stretching receivables
d. none of the above
6. The prime rate is the:
12. Gooden Foods, Inc. has a revolving
a. interest rate charged on loans to
credit agreement with its bank under which
commercial banks by the Federal Reserve
it can borrow up to P10 million at an
b. lowest published rate that large banks
annual interest rate of 12 percent. The
charge on loans made to their most credit-
firm is required to maintain a 10 percent
worthy business customers
compensating balance on any funds
c. interest rate on prime commercial paper
borrowed under this agreement and to pay
d. prevailing interest rate on Treasury Bills
a 0.5 percent commitment fee on the
unused portion of the credit line.
7. Calculate the annual financing cost of
Determine the annual financing cost to
foregoing the cash discount if the credit
Gooden Foods of borrowing P4 million.
terms are 1/10, net 40.
a. 13.3%
a. 6.0 percent
b. 14.7%
b. 9.2 percent
c. 14.2%
d. none of the above

13. Northwest Container Company is

c. 15.3 percent
considering selling an issue of commercial
d. None of the above

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paper to finance its seasonal needs. A d. Commercial paper: 10.49% vs 10.52%
commercial paper dealer has offered to sell bank
a P10 million issue maturing in 90 days at
an interest rate of 10 percent per annum 17. Ikon obtained a loan for P50,000. If
(deducted in advance). The dealer's fee loan requires a repayment of P51,000 in 91
for selling the commercial paper would be days, what is the loan’s APR?
P10,000. Determine the annual financing a. 8.0%
cost of commercial paper financing to b. 8.48%
Northwest. c. 8.27%
a. 10.7% d. 8.19%
b. 10.3%
c. 10.0% Problems
d. 9.3%
Answer: a 1. Chubby Co. purchases pork on terms
3/15 net 60. Assuming 360 days a
14. Pressing Club Corporation can raise year, what is the annual cost of trade
needed short-term funds by pledging its credit if the company pays on:
receivables. First Bank will lend Pressing (a) day 15?
70 percent of the P2.5 million in pledged (b) day 20?
receivables at 11.2 percent plus a service (c) day 30?
fee that equals 0.75 percent of the amount (d) day 40?
of the pledged receivables. Interest is (e) day 50?
computed based on the amount of (f) day 60?
receivables pledged. If Pressing's average (g) day 70?
collection period is 55 days, what is the
annual financing cost for the pledged 2 . Mime Theatrical Supply is in the process
receivables? of negotiating a line of credit with two local
a. 2.7% banks. The prime rate is currently 8
b. 18.3% percent. The terms follow:
c. 23.1% Bank Loan Terms
d. 11.2% 1st National 1 percent above prime
rate on a discounted
15. Modern Textiles, Inc. is considering basis and a 20
factoring its receivables. The firm has  percent compensating
annual sales of P109.5 million. Its average balance on the face
collection period is 73 days. Bad-debt value of the loan.
losses average 2% of sales and credit 2nd National 2 percent above prime
department costs are P360,000 per year. rate and a 15 percent
Both of these costs would be eliminated if compensating
Modern Textiles factors its receivables.  balance.
The factor will charge a fee of 3.5% on all (a)Calculate the effective interest rate of
receivables it purchases from the company. both banks.
The factor will advance up to 80% of the (b)Recommend which bank’s line of credit
value of the receivables at an annual Mime Theatrical Supply should accept.
interest rate of 12%. Interest is deducted .
from the amount of the advance. 3. A&A Company purchased a new machine
Determine the annual financing cost to on October 20th, 2003 for P1,000,000 on
Modern Textiles of factoring its receivables credit. The supplier has offered A&A terms
and borrowing under this arrangement. of 2/10, net 45. The current interest rate
Assume 365 days in any calculations. the bank is offering is
a. 22.3% 16 percent.
b. 20.1% (a)Compute the cost of giving up cash
c. 13.5% discount.
(b)Should the firm take or give up the cash
16. RoTech Medical Corp. needs to borrow discount?
P15 million pesos for 270 days. It can (c)What is the effective rate of interest if
borrow from its bank at its current interest the firm decides to take the cash
rate of 9.75% plus a requirement to keep a discount by borrowing money on a
10% compensating balance. RoTech discount basis? Assume 360 days in a
currently has a P400,000 balance with its year.
bank. An alternative for RoTech is to sell
commercial paper. The interest rate on the
paper is 9.55% and the dealer’s fee for 4. General Aviation has just sold an issue
selling the paper is P22,500. Which source of 30-day commercial paper with a face
has the least cost? value of P5,000,000. The firm has just
a. Bank loan: 10.02% vs. 10.49% for received P4,958,000. What is the effective
paper annual interest rate on the commercial
b. Bank loan: 10.02% vs. 10.75% for paper?
paper
c. Commercial paper: 9.70% vs 10.02% 5. A&A Apple Company would like to
bank manufacture and market a new packaging.

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A&A has sold an issue of commercial paper
for P1,500,000 and maturity of 90 days to
finance the new project. Compute the
annual interest rate on the issue of
commercial paper if the value of the
commercial paper at maturity is
P1,650,000. Assume 360 days in a year.
6. Ofel Industries has a line of credit at
Manila Bank that requires it to pay 11%
interest on its borrowing and to maintain a
compensating balance equal to 15% of the
amount borrowed. Ofel borrowed P800,000
during the year under the agreement.
Compute the effective annual rate on the
firm’s borrowings in ach of the following
circumstances
(a)The firm maintains no deposit balances
at the bank.
(b) The firm maintains P70,000 of deposit
balances at the bank.
(c) The firm maintains P150,000 of deposit
balances at the bank.
7. Louie Aristorenas obtained a P10,000,
90 day bank loan at an annual interest rate
of 15%, payable at maturity. (Assume 360
days a year).
a. What is the peso interest on the 90 day
loan?
b. Find the effective 90 day rate on the
loan.
c. What is the effective annual rate
assuming that the loan is rolled over every
90 days throughout the year?
8. Bernaldo Co. wants to establish a
borrowing agreement with a bank. The
bank’s term for a line of credit are 3.30%
over the prime rate, and each year the
borrowing must be reduced to zero for a 30
day period. For an equivalent revolving
credit agreement , the rate is 2.80% over
prime with a commitment fee of 0.50% on
the average unused balance. With both
loans the required compensating balance is
20% of the amount borrowed. Bernaldo
has no deposits with the bank. The prime
rate is 8%. Both agreements has P4 million
borrowing limits. The firm expects to
borrow 42 million during the year.
a. What is the effective annual rate under
the line of credit?
b. What is the effective annual rate under
9. Giant Feeds, Inc. is considering
obtaining funding through advances
against receivables. Total annual credit
sales are P600,000, terms are net 30 days,
and payment is made on the average of
30 days. Western National Bank will
advance funds under a pledging
arrangement for 13 percent annual
interest. On average, 75 percent of credit
sales will be accepted as collateral.
Commodity Finance offers factoring on a
nonrecourse basis for a 1 percent factoring
commission, charging
1.5 percent per month on advances and
requiring a 15 percent factor’s reserve.
Under this plan,
the firm would factor all accounts and close
its credit and collections department,
saving P10,000 per year.
(a) What is the effective interest rate and
the average amount of funds available
under pledging and under factoring?
(b) Which plan do you recommend? Why?
10. Chubby Co. is in a liquidity problem
and needs P100,000 loan for a month. Its
accounts receivable is at low levels but its
inventory is liquid therefore a good
collateral for a loan. The book value of
inventory is P300,000 of which P120,000 is
finished goods. Assume a 365-days a year.
1. City Wide Bank will make a P100,000
trust receipt loan against the finished
goods. The annual interest is 12% on
outstanding balance plus a 0.25%
administration fee imposed on the
P100,000 initial loan amount. Because it
will be liquidated as inventory is sold, the
average amount owed over the month is
expected to be P75,000.
2. Sun State Bank will lend P00,000
against a floating lien on the book value of
inventory for the 1-month period at an
annual interest rate of 13%.
3. Citizen’s Bank will lend P100,000
againts a warehouse receipt on the finished
goods inventory and charge 15% annual
interest on the outstanding loan balance. A
0.5% warehousing fee will be levied
against the average amount borrowed.
Because the loan will liquidate as inventory
is sold, the average loan balance is
expected to be P60,000.
Requirements:
a. Compute the peso cost of each proposed
plan .
b. Which is recommended/ Why?
c. If the firm made a purchase of P100,000
for which it had been given terms of 2/10
net 30, would it increase the firm’s
profitability to give up the discount and not
borrow? Why?