Chapter 16
Problem 6 Thompson Inc. has a $10 million revolving credit agreement with its bank. It pays interest on bo
owing at 2% over prime and a .25% commitment fee on available but unused funds. Last month Thompson had bo
owings of $5 million for the first half of the month and $10 million for the second half. Calculate its interest charges for a month. The bank's prime rate is 6%.
Problem 17 The Shamrock Company has a raw materials inventory of $20 million, which is completely replaced approximately 10 times a year. The Bridgewater Bank is willing to advance financing of 75% of the value of Shamrock's inventory at an interest rate of 12%. However, it requires a warehousing system to secure its interests. A warehousing company will install and operate the system for $800,000 a year plus .5% of the value of materials entering the system. What is the effective cost of this financing to Shamrock?
Chapter 18
Business Analysis 1 You're the treasurer of Warm Weather Inc., which imports wool sweaters from around the world. Kreploc, a company in the country of Slobodia, has a product your marketing department would like to ca
y and doesn't require payment until 90 days after delivery. Unfortunately, the Slobodian blivit tends to vary in value by as much as 30% over periods as short as three months. This makes you reluctant to do business with Kreploc because of exchange rate risk. The marketing department can't understand why you have any concerns at all. Prepare a
ief explanation, including an illustration, of why you're concerned.
Business Analysis 2 You're the CFO of the Overseas Sprocket Company, which imports a great deal of product from Europe and Far East and is continually faced with exchange rate exposure on unfilled contracts. Ha
y Byrite, the head of purchasing, has a plan to avoid exchange rate losses. He suggests that the firm bo
ow enough money from the bank to buy aa six month supply of foreign exchange that would be kept in a safety deposit box until used. "We'd never have another unexpected exchange raate loss again, "says Ha
y. Prepare a polite response to Ha
y's Idea. Explain why you do or don't like it, and suggest an alternative if you feel one is appropriate.