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WC Management Short Term Liabilities

The document contains 5 word problems related to working capital management and short-term financing options for businesses. Problem 1 asks the principal amount of a line of credit with a stated 12% interest rate deducted in advance and a 20% compensating balance requirement. Problem 2 asks which short-term financing option is cheaper between a bank loan at 12% or foregoing a 2/10, net 30 discount. Problems 3 and 4 provide scenarios asking about maximum short-term loan amounts while maintaining a required current ratio or financing a capital expansion. Problem 5 provides details of a supplier invoice, short-term bank loan, and discount terms to calculate required loan amounts, interest rates and costs.

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Maica Jarie Rigua
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160 views1 page

WC Management Short Term Liabilities

The document contains 5 word problems related to working capital management and short-term financing options for businesses. Problem 1 asks the principal amount of a line of credit with a stated 12% interest rate deducted in advance and a 20% compensating balance requirement. Problem 2 asks which short-term financing option is cheaper between a bank loan at 12% or foregoing a 2/10, net 30 discount. Problems 3 and 4 provide scenarios asking about maximum short-term loan amounts while maintaining a required current ratio or financing a capital expansion. Problem 5 provides details of a supplier invoice, short-term bank loan, and discount terms to calculate required loan amounts, interest rates and costs.

Uploaded by

Maica Jarie Rigua
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Working Capital Management – Short Term Financing

Asynchronous Activity for Finals

Problem 1
The company received a line of credit from its bank. The stated interest rate is 12%, deducted in advance. The line of credit agreement
requires that an amount equal to 20% of the loan be deposited into a compensating balance account. On March 1, the company drew
down the entire usable amount of the loan and received the proceeds of P340,000. How much is the principal amount of the loan?
a. P340,000 b. P500,000 c. P231,000 d. 448,800

Problem 2
Jun Traders, a merchandising firm, purchases merchandise from its suppliers on credit terms of 2/10, net 30. Jun Traders needs cash,
so it is considering two alternatives:
Alternative 1 - Obtain a short-term loan from a bank at an effective interest rate of 12%.
Alternative 2 - Forego the discount on its credit purchases and pay on the 30th day of the term.
Jun Traders should choose (Use a 360-day year.)
a. Alternative 2 because this is a costless credit financing.
b. Alternative 2 because its cost is cheaper by 10%.
c. Alternative 1 because its cost is cheaper by 24.73%.
d. Alternative 1 because its cost is cheaper by 1%.

Problem 3
A company's policy is to maintain a current ratio of at least 2:1. At present, its current ratio is 2.5 is to 1. If current liabilities at present
amounts to P250,000, what is the maximum amount of short-term commercial loan that can be obtained by the firm to finance
inventory expansion without violating its current ratio policy?
a. P125,000 b. P0 c. P62;500 d. P50,000

Problem 4
The expected boom in business in the coming period led the Baby Apple Company to decide to expand its operations. The expansion
requires an increase of P500,000 in working capital, which the company is considering to finance through any of the following
alternatives:
1. Pledge the accounts receivable
The company's average accounts receivable is P625,000 per month. A financier will lend 80% of the face value of the
receivables at 10% interest per annum, payable on the maturity of the loan.
2. Issue P515,000 of 3-month commercial paper to net P500,000. New paper will be issued every 3 months.
3. Borrow from a commercial bank an amount that will net P500,000 after deducting a compensating balance of 15% and
interest of 5%.
Use a 360-day year in all your calculations.
The cost of Alternative 1 is
a. 10% b. 12.5% c. 8% d. 120%
The cost of Alternative 2 is
a. 11.65% b. 1% c. 12% d. 0.97%
The cost of Alternative 3 is
a. 5% b. 20% c. 25% d. 6.25%

Problem 5
Jem Traders, Inc. needs P100,000 to pay a supplier's invoice for merchandise purchased with terms of 2/10, net 30. Jem Traders wants
to pay on the 10th day of the credit term so it can avail of the 2% discount.
The funds needed can be raised by obtaining a short-term loan from a bank which agrees to grant a 30-day loan at 120/ discounted
interest per annum. The bank requires that a compensating balance of 10% be maintained in the borrower's non-interest earning
deposit account.
The amount needed by Jem Traders to pay the invoice within the discount period is
а. P98,000 b. P100,000 c. P9,000 d. P102,000

The principal amount of the loan that must be obtained from the bank to raise the needed fund is
a. P110,112. b. P108,780. c. P112,360. d. P125,640.

What is the effective interest rate of the loan?


a.12% b. 10% b. 22% d. 13.48%
If Jem Traders fails to pay the discount and pays the account on the 30th day of the term, what is the annual cost of this non-
free trade credit?
a. 24% b.. 2% c. 36.73% d. 0

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