GRAND CANYON FIN504 MODULE 7 Assignment Long-Term and Short-Term Financial Decisions Problems

Fixed Rate Loan

Given Data:

Days 365

Loan $200,000.00

Prime Rate 7.00%

Maturity 60 days

Prime Excess 2.00%

a. The total dollar interest cost on the First American Loan

Loan Prime+ Maturity Total Dollar Interest

$200,000.00 9.00% 0.164383562 $2,958.90

b. The 60-day rate on the loan

Total Dollar Interest Loan 60-day Rate

$2,958.90 $200,000.00 1.4795%

c. Effective annual rate of interest on fixed 60-day loan

60-day Rate Periods in Year Effective Annual Rate

1.4795% 6.083333333 9.3453%

Floating Rate Loan

Given Data:

Days 365

Loan $200,000.00

Prime Rate 7.00% 7.50%$$

Maturity 60 30

Prime Excess 1.50%

d. The Initial Rate

Prime Rate Prime Excess Initial Rate-1st 30 day rate

7.00% 1.50% 8.50%

e. Interest Rate for first and last 30-day periods

Intial Rate + Maturity First 30 Day Rate

8.50% 0.082191781 0.6986%

initial rate + Maturity Last 30 day rate

9.00% 0.082191781 0.7397%

f. Total Dollar Interest Cost

Loan 1st 30 Days Last 30-Days Total Interest Cost

$200,000.00 0.6986% 0.7397% $2,876.71

g. 60-Day rate of Interest

Total Interest Cost Loan 60-Day Rate

$2,876.71 $200,000.00 1.4384%

h. Effective Annual Interest Rate on 60-Day Loan

60-Day Rate Periods in Year Effective Annual Rate

1.4384% 6.083333333 9.0762%

Chapter 13 Leverage and Capital Structure

Calculation of Share Value

Estimates Associated with

Alternative capital Structures

Capital Structure Expected Estimated Estimated

Debt Ratio EPS Required Return Share Value

0 1.75 0.114 =B10/C10

10 1.9 0.118 =B11/C11

20 2.25 0.125 =B12/C12

30 2.55 0.1325 =B13/C13

40 3.18 0.18 =B14/C14

50 3.06 0.19 =B15/C15

60 3.1 0.25 =B16/C16

Rock-O Corporation

Stockholders' Equity Section

Before the Reverse Stock Split

Common stock 900,000 shares $1.00 par $900,000

Paid-in-Capital 7,000,000

Retained Earnings 3,500,000

Total Stockholders' Equity $11,400,000

Reverse Stock Split

Stock Split 2 3

Common stock 600,000 shares $1.50 par $900,000

Paid-in-Capital 7,000,000

Retained Earnings 3,500,000

Total Stockholders' Equity $11,400,000

Analysis of Initiating a Cash Discount

for Eboy Corporation

Increase in units due to discount 50

Selling price @net 30 $4,200

Variable Cost Per Unit $2,600

Additional Profit Contribution from Sales: $80,000

Cost of Marginal Investment in AccCounts Receivable

Variable cost per unit $2,600

Raw Material annual usage 1450

Accounts Receivable $443,000

Sales $3,544,000

Days 365

Collection Period 45.625

AR Turnover 8.0

Average investment presently (w/o discounts) $471,250

Variable cost per unit $2,600.00

Raw Material annual usage 1500

Expected AR Turnover due to discount 12.0

Average investment presently (with cash discounts) $325,000

Reduction in accounts receivable investment $146,250

Opportunity cost of funds 12.5%

Cost Savings from reduced investment in AR $18,281

Cash Discount term 2.00%

Percentage of customers to take discount 70%

Raw Material annual usage (new) 1500

Selling price per unit $4,200

Cost of Cash Discount $88,200

Net Profit from initiation of proposed cash discount $10,081