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Chapter 15
Current Liabilities Management
Solutions to Problems
P15-1. LG 1: Payment Dates
Basic
(a) December 25
(b) December 30
(c) January 9
(d) January 30
P15-2. LG 1: Cost of Giving Up Cash Discount
Basic
(a) (0.02 ÷ 0.98) × (365 ÷ 20) = 37.24%
(b) (0.01 ÷ 0.99) × (365 ÷ 20) = 18.43%
(c) (0.02 ÷ 0.98) × (365 ÷ 35) = 21.28%
(d) (0.03 ÷ 0.97) × (365 ÷ 35) = 32.25%
(e) (0.01 ÷ 0.99) × (365 ÷ 50) = 7.37%
(f) (0.03 ÷ 0.97) × (365 ÷ 20) = 56.44%
(g) (0.04 ÷ 0.96) × (365 ÷ 170) = 8.95%
P15-3. LG 1: Credit Terms
Basic
(a) 1/15 net 45 date of invoice
2/10 net 30 EOM
2/7 net 28 date of invoice
1/10 net 60 EOM
(b) 45 days
50 days
28 days
80 days
(c)
CD 365
Cost of giving up cash discount 100% CD N
= ×
Cost of giving up cash discount 100% 1% 30
Cost of giving up cash discount 0.0101 12.17 0.1229 12.29%
= ×
= × = =
Cost of giving up cash discount 100% 2% 20
Cost of giving up cash discount 0.0204 18.25 0.3723 37.23%
= ×
= × = =
Cost of giving up cash discount 100% 2% 21
Cost of giving up cash discount 0.0204 17.38 0.3646 36.46%
= ×
= × = =
Cost of giving up cash discount 100% 1% 50
Cost of giving up cash discount 0.0204 7.3 0.1489 14.89%
= ×
= × = =
(d) In all four cases the firm would be better off to borrow the funds and take the discount. The
annual cost of not taking the discount is greater than the firm’s 8% cost of capital.
P15-4. LG 1: Cash Discount versus Loan
Basic
Cost of giving up cash discount = (0.03 ÷ 0.97) × (365 ÷ 35) = 32.25%
Since the cost of giving up the discount is higher than the cost of borrowing for a short-term loan,
Erica is correct; her boss is incorrect.
P15-5. LG 1, 2: Cash Discount Decisions
Intermediate
(a) (b)
Supplier Cost of Forgoing Discount Decision
J (^) (0.01 ÷ 0.99) × (365 ÷ 20) = 18.43% Borrow
K (^) (0.02 ÷ 0.98) × (365 ÷ 60) = 12.42% Give up
L (^) (0.01 ÷ 0.99) × (365 ÷ 40) = 9.22% Give up
M (^) (0.03 ÷ 0.97) × (365 ÷ 45) = 25.09% Borrow
Prairie would have lower financing costs by giving up Ks and Ls discount since the cost of
forgoing the discount is lower than the 16% cost of borrowing.
(c) Cost of giving up discount from Supplier M = (0.03 ÷ 0.97) × (365 ÷ 75) = 15.05% In this
case the firm should give up the discount and pay at the end of the extended period.
P15-6. LG 2: Changing Payment Cycle
Basic
Annual Savings = ($10,000,000) × (0.13) = $1,300,
P15-11. LG 3: Compensating Balance vs. Discount Loan
Intermediate
(a)
State Bank interest 10.0% $150,000 ($150,000 0.10) $135, 000
×
− ×
This calculation assumes that Weathers does not maintain any normal account balances at
State Bank.
Frost Finance interest 9.89% $150,000 ($150,000 0.09) $136, 500
×
− ×
(b) If Weathers became a regular customer of State Bank and kept its normal deposits at the bank,
then the additional deposit required for the compensating balance would be reduced and the
cost would be lowered.
P15-12. LG 3: Integrative–Comparison of Loan Terms
Challenge
(a) (0.08 + 0.033) ÷ 0.80 = 14.125%
(b) Effective annual interest rate =
[$2,000,000 (0.08 0.028) (0.005 $2,000,000)]
× + + ×
×
(c) The revolving credit account seems better, since the cost of the two arrangements is the same;
with a revolving loan arrangement, the loan is committed.
P15-13. LG 4: Cost of Commercial Paper
Intermediate
(a)
Effective 90-day rate = 2.25% $978,
Effective annual rate = (1 + 0.0225)
365/ − 1 = 9.44%
(b)
[$1,000,000 $978,000 $9,612]
Effective 90-day rate 3.26% ($978,000 - $9,612)
Effective annual rate = (1 + 0.0326)
365/ − 1 = 13.89%
P15-14. LG 5: Accounts Receivable as Collateral
Intermediate
(a) Acceptable Accounts Receivable
Customer Amount
D $8,
E 50,
F 12,
H 46,
J 22,
K 62,
Total Collateral $200,
(b) Adjustments: 5% returns/allowances, 80% advance percentage.
Level of available funds = [$200,000 × (1 − 0.05)] × 0.80 = $152,
P15-15. LG 5: Accounts Receivable as Collateral
Intermediate
(a)
Customer Amount
A $20,
E 2,
F 12,
G 27,
H 19,
Total Collateral $80,
(b) $80,000 × (1 − 0.1) = $72,
(c) $72,000 × (0.75) = $54,
P15-16. LG 3, 5: Accounts Receivable as Collateral, Cost of Borrowing
Challenge
(a) [$134,000 − ($134,000 × 0.10)] × 0.85 = $102,
(b) ($100,000 × 0.02) + ($100,000 × 0.115) = $2,000 + $11,500 = $13,
Interest cost 13.5% for 12 months $100,
($100,000 × 0.02) +
⎜ ×
⎟ =^ $2,000^ +^ $5,750^ =^ $7,
Interest cost 7.75% for 6 months $100,
Effective annual rate = (1 + 0.0775)
2 − 1 = 16.1%
($100,000 × 0.02) +
×
Interest cost 4.88% for 3 months $100,
Effective annual rate = (1 + 0.0488)
4 − 1 = 21.0%
