Introduction to Finance

518
C H A PT E R 1 6 Short-Term Business Financing
c. 
$500,000 maturing in 180 days with a stated annual rate of 
8.25 percent. Fees are 0.03 percent of the principal.
d. 
$50 million maturing in 210 days with a stated annual rate of 
6.5 percent. Fees are 0.10 percent of the principal.
9. 
Construct a spreadsheet that computes the eff ective annual rates 
on the commercial paper off erings. Inputs to the spreadsheet should 
include the dollar amount of paper to be issued, the number of days 
the paper is outstanding, the stated annual rate, and fees. All paper 
is sold on a discount basis. Use it to fi nd the eff ective annual rates in 
Problem 8.
10. 
Wonder Dog Leash Company is examining their accounts receiv-
able patterns. Wonder’s customers are off ered terms of 1/10 net 30. 
Of their receivables, $150,000 is current, $75,000 is one month over-
due, $30,000 is two months overdue, and $20,000 is over two months 
overdue.
a. 
What proportion of Wonder’s customers pay their bills on time?
b. 
What is the eff ective cost of Wonder’s terms of trade credit?
c. 
What might happen to their receivables balance if they changed 
their terms to 1/15 net 30? To 2/10 net 30?
11. 
Wonder Dog Leash Company is seeking to raise cash and is in 
negotiation with Big Bucks fi nance company (BB) to pledge their 
receivables.
BB is willing to loan funds against 75 percent of current (that 
is, not overdue) receivables at a 15 percent annual percentage rate 
(see the aging of receivables in Problem 10). To pay for its evaluation 
of Wonder’s receivables, BB charges a 2.5 percent fee on the total 
balance of current receivables.
a. 
If a loan’s average term is 30 days, what is the eff ective interest 
rate if Wonder pledges its receivables?