Question

Charming Paper Company sells to the 12 accounts listed here. Account A B C 0 E F G H I Receivable Balance Outstanding $ 62,300 174,000 77,000 27,100 59,300 257,000 34,600 340,000 42,900 96,900 305,000 66,400 Average Age of the Account Over the Last Year 29 44 12 61 43 35 20 67 35 53 23 38 K Capital Financial Corporation will lend 90 percent against account balances that have averaged 30 days or less. 80 percent for account balances between 31 and 40 days, and 70 percent for account balances between 41 and 45 days. Customers that take over 45 days to pay their bills are not considered acceptable accounts for a loan. The current prime rate is 18.50 percent, and Capital charges 5 50 percent over prime to Charming as its annual loan rate. a. Determine the maximum loan for which Charming Paper Company could qualify. Maximum loan amount b. Determine how much one month's interest expense would be on the loan balance determined in part a. (Do not round intermediate calculations. Round your finel answer to 2 decimal places.) Interest expense

Answer 1

Answer: 1

Charmin Paper Company

a.                     0–30 days                                                                 Amount

A                                                                       $  62300

C                                                                            77000

G                                                                           34600

K                                                                         305000

                                          Total                                  478900

                                          Loan %                                   90%

                                          Loan                                $431010

31–40 days                                                               Amount

F                                                                       $ 257000

I                                                                             42900

L                                                                            66400

                                   Total                              $ 366300

                                   Loan%                                  80%

                                   Loan                              $ 293040

41–45 days                                                               Amount

B                                                                        $174000

E                                                                            59300

                                   Total                               $233300

                                   Loan %                                  70%

                                   Loan                               $163310

Maximum Loan = $431010 + $293040 + $163310 = $887360

b.                     Loan balances                                             $ 887360

Interest, 24% annual
(18.5% prime + 5.5%)                                    (2%)         2% per month

One month’s interest                                $ 17747.20

Answer: 2

Pittsburgh Iron Works

a.                     Sales price, December Treasury bond contract

(Sale takes place in July)                                                                  $195000

Purchase price, December Treasury bond contract

(15% price decline) .85 × $195000 =                                                  165750

Gain per contract                                                                                $ 29250

Number of contracts                                                                                     5

Profit on futures contracts                                                                $ 146250

b.         A profit took place because the value of the bond went down due to increasing rates. This meant the subsequent purchase price was less than the initial sales price.

c.                     Increased interest cost                              $158000

Profit from hedging                                  146250

Net cost                                                    $11750

=net cost / increased interest cost

= $11750/$158000 = 7.45%

The net cost is 7.45 percent. This means 92.55 percent of the increased interest cost was hedged away.

d.         If interest rates went down, there would be a loss on the futures contracts. The lower interest rates would lead to higher bond prices and a purchase price that exceeded the original sales price.