CMA Study Group

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  • 1.  Part 3 Q

    Posted 10-07-2010 03:44 PM

    Q1. Snug-fit, a maker of bowling gloves, is investigating the possibility of liberalizing its credit policy. Currently, payment is made on a cash-on-delivery basis. Under a new program, sales would increase by $80,000. The company has a gross profit margin of 40%. The estimated bad debt loss rate on the incremental sales would be 6%. Ignoring the cost of money, what would be the return on sales before taxes for the new sales?

    a. 34.0%.

    b. 36.2%.

    c. 40.0%.

    d. 42.5%.

    Q2. Burke Industries has a revolving credit arrangement with its bank which specifies that Burke can borrow up to $5 million at an annual interest rate of 9% payable monthly. In addition, Burke must pay a commitment fee of 0.25% per month on the unused portion of the line, payable monthly. Burke expects to have a $2 million cash balance and no borrowings against this line of credit on April 1, net cash inflows of $2 million in April, net outflows of $7 million in May, and net inflows of $4 million in June. If all cash-flows occur at the end of the month, approximately how much will Burke pay to the bank during the second quarter related to this revolving credit arrangement?

    a. $47,700.

    b. $52,600.

    c. $60,200.

    d. $62,500.

    Q3. The Duoplan Company is determining the most appropriate source of short-term funding. Trade credit terms from suppliers are 2/30, net 90. The rate for borrowing at the bank is 12%. The company has also been approached by an investment banker offering to issue Duoplan’s commercial paper. The commercial paper would be issued quarterly in increments of $9.1 million with net proceeds of $8.8 million. Which option should the firm select?

    a. The trade discount, because it provides the lowest cost of funds.

    b. Bank borrowing, because it provides the lowest cost of funds.

    c. Commercial paper, because it provides the lowest cost of funds.

    d. The costs are so similar that the decision is a matter of convenience.

    Q4. Clauson Inc. grants credit terms of 1/15, net 30 and projects gross sales for the year of $2,000,000. The credit manager estimates that 40% of customers pay on the 15th day, 40% of the 30th day and 20% on the 45th day. Assuming uniform sales and a 360-day year, what is the projected amount of overdue receivables?

    a. $50,000.

    b. $83,333.

    c. $116,676.

    d. $400,000.



  • 2.  Re: Part 3 Q

    Posted 10-08-2010 12:14 PM

    How can A be the answer to #3?  

    Trade credit is 2% for 60 days use of the money.  Based on a 365-day year, this equates to an annual rate of OVER 12%.  Bank borrowing, B is superior at 12.0%.  The commercial paper is over 13.



  • 3.  Re: Part 3 Q

    Posted 10-08-2010 04:13 PM

    Hi Mahmoud

    Thank you for your answers.

    But answer for Q2. is 52600 option b.

    April = 2m+2m=4m inflow, no interest, CF= 5m*.25%= 12500

    May = (7m)-4m=(3m), use credit 3m, interest= 3m*.75%= 22500, CF= 2m unused*.25%=5000, total=27500

    June= 4m inflow , pay 3m credit from inflow, 5m unused credit, no interest, CF= 5m+27500+12500=5.04m*.25%=12600

    Total= 12600+27500+12500=52600

    I think this is the way to the answer. Answer given in the retired q is anyways Option b 52600



  • 4.  Re: Part 3 Q

    Posted 10-08-2010 04:25 PM

    Q3.  Answer is b as per practice Qs

    Steven is right, trade credit is 12.24%, bank is 12%, 

    can u help me with calculations of commercial paper?



  • 5.  Re: Part 3 Q

    Posted 10-08-2010 04:31 PM

    Q4. Answer is Option a 50000

    overdue receivables =45*20%= 9 days

    amt= 2m *9/360= 50000



  • 6.  Re: Part 3 Q

    Posted 10-08-2010 05:25 PM

    yes... commercial paper issued 9.1, recevied 8.8, so it cost them .3 million - as a percentage of 9.1 that is about 3.3% for 90 days.... times 4 is over 13% per annum



  • 7.  Re: Part 3 Q

    Posted 10-08-2010 05:36 PM

    re sarika post Q4 above..

     

    HUH???



  • 8.  Re: Part 3 Q

    Posted 10-08-2010 08:13 PM

    Overdue receivables would be those that have passed the billed due date without being paid.

    @ question 4 the qustion is what is "Projected Overdue Receivable". As the credit term is 1/15, net 30, overdue receivable would be 20% to be received on 45th day. (15 days overdue).

    i.e 2,000,000/360*30*20% = 33,333 for current month &

    2,000,000/360*15*20% = 16,666 from previous month.

    i.e. 50,000

    I am not sure about this answer, Please rectify if it is incorrect.



  • 9.  Re: Part 3 Q

    Posted 10-09-2010 04:15 PM

    q4: sales are 2m per year or $5555 per day of this 20% or $1,111 is 45 days overdue. therefore at any point in time the overdue receivables are $1111  x 45 days = $49,995 or rounded to $50,000.

    correct answer for q4 is A



  • 10.  Re: Part 3 Q

    Posted 10-19-2010 05:45 PM

    Re Q2 - I don't understand this problem.  It seems they are calculating the interest in the following month since it occurred at the end of the month.  Can someone please explain this? 

    Thanks in advance.



  • 11.  RE: Re: Part 3 Q

    Posted 05-31-2017 09:16 PM
    we have 80% on due and 20% over due payment of $2,000,000 sales/receivables during 360 days,
    That means: $1,600,000 receivable is paid on due and $400,000 receivable is over due, all of them are looking at 360 days
    360 days is equal to 8 cycles of 45 days period. So that, in average, one cycle of 45 days credit sales has $400,000/8 = $50,000 over due/cycle with45 days.

    Hope you see it. :)

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    Bao Nguyen Quoc
    Student
    Ho Chi Minh
    Viet Nam
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