MANAGEMENT ADVISORY SERVICES Working Capital Management

EXERCISES A. What was Amore’s total debt in 2002?

Working Capital Policy
i
. Real Company has P8,000,000 in current assets, P3,500,000 of which are considered B. How much new, long-term debt financing will be needed in 2003?
permanent current assets. In addition, the firm has P6,000,000 invested in fixed assets. Real
Company wishes to finance all fixed assets and permanent current assets plus half of its iv
. The KRAM Company had the following data for the current year, 2004:
temporary current assets with long-term financing costing 15 percent. Short-term financing Sales, 2004 P4,000,000
currently costs 10 percent. Real Company's earnings before interest and taxes are Sales, 2005 5,500,000
P2,200,000. Income tax rate is 40 percent. Items that vary directly with sales:
Assets 45%
How much would Real Company's earnings after taxes under this financing plan? Liabilities 15%
Net profit margin 15%
ii
. A firm that is in the process of preparing its financial plan for the upcoming year has estimated Payout ratio 45%
the following current assets (in P000,000) for the year.
Month CA Month CA Month CA Required:
Jan 19.2 May 36.6 Sept 26.9
Feb 21.6 June 43.8 Oct 25.5 1. Compute the projected additional financing needed for 2005.
Mar 24.5 Jul 40.5 Nov 23.4
Apr 33.4 Aug 34.4 Dec 20.7 2. Compute the projected additional financing needed for 2005 under each assumption:

The firm’s fixed assets should remain constant at P40 million. Owner’s equity is forecast to be A. Payout ratio is 55%
P25 million. Working capital policy requires that 50% of maximum current assets be financed
with permanent financing. B. Net profit margin is 10% and payout ratio is 30%

1. How much will the firm’s permanent level of assets be for the coming year? C. Sales next year is P5,000,000 and the payout ratio is 40%.
v
2. Compute the permanent financing requirement of the firm. . The 2003 sales of Reign Co. amounted to P8 million. The dividend payout ratio is 30%. The
percent of sales in each balance sheet item that varies directly with sales are expected to be
3. Compute the maximum temporary financing requirement of the firm. as follows:
Cash 8%
External Financing Needed Receivables 15%
iii
. At year-end 2002, total assets for Amore Inc. were P1.2 million and accounts payable were Inventories 16%
P375,000. Sales, which in 2002 were P2.5 million, are expected to increase by 25% in 2003. Net fixed assets 30%
Total assets and accounts payable are proportional to sales, and that relationship will be Accounts payable 12%
maintained. Amore typically uses no current liabilities other than accounts payable. Common Accrued expenses 6%
stock amounted to P425,000 in 2002, and retained earnings were P295,000. Amore plans to Net profit rate 9%
sell new common stock in the amount of P75,000. The firm’s profit margin on sales is 6
percent, 60 percent of earnings will be retained. Required:

Exercises & Problems Page 1 of 10

 MANAGEMENT ADVISORY SERVICES Working Capital Management

A. Suppose that in 2004 sales increased by 25% over 2003 sales. How much additional C. Calculate the amount of negotiated financing required to support the firm’s cash
(external) capital will be required? conversion cycle.

B. What would happen to capital requirement if Reign can increase its sales by 40% and the D. How could management reduce the cash conversion cycle?
payout ration is increased to 40%?
viii
. A firm that has an annual opportunity cost of 12% is contemplating installation of a lockbox
Cash Management system at an annual cost of P90,000. The system is expected to reduce mailing time by 2
vi
. Samson Corporation, a leading producer of automobile batteries, turns out 1,500 batteries a days, reduce processing time by 1.5 days, and reduce check clearing time by 1 day. If the firm
day at a cost of P600 per battery for materials and labor. It takes the firm 22 days to convert collects P300,000 per day, would you recommend the system?
raw materials into a battery. Samson allows its customers 40 days in which to pay for the
batteries, and the firm generally pays suppliers in 30 days. ix
. Calma Company uses a continuous billing system that results in average daily receipts of
P750,000. The company treasurer estimates that a proposed lock-box system could reduce its
A. What is the length of Samson's cash conversion cycle? collection time by 2 days.

B. At a steady state in which Samson produces 1,500 batteries a day, what amount of A. How much cash would the lock-box system free up for the company?
working capital must it finance?
B. What is the maximum amount that Calma would be willing to pay for the lock-box system
C. By what amount could Samson reduce its working capital financing needs if it was able to if it can earn 6 percent on available short-term funds?
stretch its payables deferral period to 35 days?
C. If the lock-box system could be arranged at an annual cost of P45,000, what would be the
D. Samson's management is trying to analyze the effect of a proposed new production net gain from instituting the system?
process on the working capital investment. The new production process would allow
Samson to decrease it s inventory conversion period to 20 days and to increase its daily x
. Syl Company projects that cash outlays of P45 million will occur uniformly throughout the year.
production to 1,800 batteries. However, the new process would cause the cost of Syl plans to meet its cash requirements by periodically selling marketable securities from its
materials and labor to increase to P700. Assuming the change does not affect the portfolio. The firm’s marketable securities are invested to earn 12 percent, and the cost per
receivables collection period (40 days) or the payables deferral period (30 days), what will transaction of converting securities to cash P30.
be the length of the cash conversion cycle and the working capital financing requirement if
the now production process is implemented? A. What is the optimal transaction size for transfer from marketable securities to cash?
vii
. Abbey Products is concerned about managing cash efficiently. On the average, inventories B. What will be Syl’s average cash balance?
turns over 5 times, and accounts receivable are collected in 60 days. Accounts payable are
paid approximately 30 days after they arise. The firms spends P30 million on operating cycle C. Compute the annual cost of cash based on optimal transaction size
investments each year, at a constant rate. Assuming a 360-day year.
Receivables Management
A. Calculate the firm’s operating cycle xi
. McPan Company sells on terms of 3/10, net 30. Total sales for the years are P900,000. Forty
percent of the customers pay on the 10th day and take discounts; the other 60 percent pay, on
B. Calculate the firm’s cash conversion cycle average, 40 days after their purchases. Assume 360 days per year.

Exercises & Problems Page 2 of 10

 MANAGEMENT ADVISORY SERVICES Working Capital Management

A. What is the days sales outstanding? xvi

. The Electra Car Company purchases 20,000 units of a major component part each year. The
firm's order costs are P200 per order and the carrying cost per unit is P2 per year.
B. What is the average amount of receivables?
A. Compute the total inventory costs associated with placing orders of 20,000, 10,000, 5,000,
C. What would happen to average receivables if McPan toughened up on its collection policy 1,000.
with the result that all no-discount customers paid on the 30th day?
B. Determine the EOQ for the component parts.
xii
. S Mart has sales of P3 million. Its credit period and average collection periods are both 30
days, and 1.5% of its sales end as bad debts. The manager intends to extend the credit term xvii
. Ever Company is considering switching from level production to seasonal production in order
to 45 days which will increase sales to P3.3 million. However, bad debt losses on the to lower very high inventory costs. Average inventory levels would decline by P300,000 but
incremental sales would be 3%. Costs of products and related expenses amount to 40%, production costs would rise about P40,000 because of additional startups and other
exclusive of the cost of carrying receivables of 15% and bad debt expenses. Assuming 360 inefficiencies. The firm's cost of financing inventory balances is 15%.
days a year, what incremental cost of investment is required to support the change in policy?
A. Should the firm switch to seasonal production?(ignore income taxes)
xiii
. Dessa, Inc. currently has sales of P2.5 million. Its credit period and days sales outstanding
(DSO) are both 30 days, and 1 percent of its sales end up as bad debts. The credit manager B. At what interest rate would the cost of financing additional inventory under level
estimates that, if the firm extends its credit period to 45 days so that its days sales outstanding production be equal to the added production costs of seasonal production?(ignore income
increases to 45 days, sales will increase by P250,000, but its bad debt losses on the taxes)
incremental sales would be 2.5 percent. Variable costs are 60 percent, and the cost of carrying
receivables, k, is 12.5 percent. Assume a tax rate of 40 percent and 360 days per year. C. Answer (A) and (B) if the applicable income tax rate is 40 percent.

A. Compute the incremental investment required to finance the increase in receivables if the Trade Credit
change is effected. xviii
. Cash discount Decisions. The credit terms for each of three suppliers are shown below:

B. What would be the incremental cost of carrying receivables? Supplier A 2/10 net 55
Supplier B 3/10 net 55
C. What would be the effect of those changes in net income? Supplier C 2/15 net 45
Supplier D 2/10 net 30
Inventory Management
xiv
. Wilbur Co. last year reported sales of P10,000,000 and an inventory turnover ratio of 2. The A. Determine the annual approximate cost of giving up the cash discount from each supplier.
company is now adopting a just-in-time inventory system. If the new system is able to reduce
the firm's inventory level and increase the firm's inventory turnover to 5, while maintaining the B. Assuming that the firm needs short-term financing, recommend whether it would be better
same level of sales, how much cash will be freed up? to give up the cash discount or take the discount and borrow from a bank at 20% annual
interest. Evaluate each supplier separately using your findings in Question A.
xv
. Tri Company's financial plan for next year- shows sales of P72 million and cost of sales of P45
million. It expects short-term interest rates to average 10% for the coming year. It aims to C. Assuming that the entity continuously foregoes the cash discount, compute the annual
increase inventory turnover form the present 9 times to 12 times next year. How much is the effective cost of giving up the discount on each supplier.
incremental benefits in form of cost savings that can be achieved from the plan?
Exercises & Problems Page 3 of 10
 MANAGEMENT ADVISORY SERVICES Working Capital Management

Short-term Loan 60. Barangay Bank has agreed to lend the money at a 12% rate with a 15% compensating
xix
. Divina Mendez, owner of DM Company is negotiating with Island City Bank for a P1M, 1-year balance requirement. Townbank will lend at a 13% interest rate on a discounted loan from
loan. Island City Bank has offered DM Company the following alternatives. Calculate the three months.
effective annual interest rate for each alternative. Which alternative has the lowest effective
annual interest rate? A. What is the effective rate of interest charged by each bank?

A. A 12.5 percent annual rate on a simple interest loan, with no compensating balance B. What is the cost of foregoing the discount?
required and interest due at the end of the year.
C. How much would Tyler have to borrow from each bank in order to take the discount?
B. A 9.25 percent annual rate on a simple interest loan, with a 20 percent compensating
balance required and interest again due at the end of the year. D. Suppose that Tyler normally banks with Barangay Bank and maintains deposit balance of
P15,000, what amount would have to be borrowed and what would the effective interest
C. A 8.75 percent annual rate on a discount loan, with a 20 percent compensating balance. rate be?

D. A 8.75 percent annual rate on a discount loan, with a 20 percent compensating balance xxii
. Dela Merced, owner of DM Company is negotiating with Island City Bank for a P500,000, 1-
and an existing cash balance of P150,000 year loan. Island City Bank has offered DM Company the following alternatives. Calculate the
effective annual interest rate for each alternative. Which alternative has the lowest effective
E. A 8.75 percent annual rate on a discount loan, with a 20 percent compensating balance annual interest rate?
which earns 5% interest income.
A. A 12 percent annual rate on a simple interest loan, with no compensating balance
F. A 8.75 percent annual rate on a discount loan, with a 20 percent compensating balance required and interest due at the end of the year.
and an existing cash balance of P150,000. The bank balance earns 5% interest income.
B. A 9 percent annual rate on a simple interest loan, with a 20 percent compensating
Redo requirement (A) to (F) assuming the loan is for four (4) months. balance required and interest again due at the end of the year.

Short-term Financing Alternatives C. An 8.75 percent annual rate on a discount loan, with a 15 percent compensating balance.
xx
. Lance Hardware can buy equivalent materials from two-distributors. Supplier A offers term
1/10, net 30 whereas Supplier B provides terms of 2/15, net 60. D. Interest is figured as 8 percent of the P50,000 amount, payable at the end of the year, but
the P50,000 is repayable in monthly installments during the year.
A. If Lance foregoes the discount, which of the two suppliers should it purchase from if
supply prices are comparable.

B. If Lance can borrow from Lending Bank at a 16%, should it forego the discount?

C. If in (B) above the bank requires a 20% compensating balance for the loan, should the
firm forego the discount?
xxi
. Tyler Company needs P100,000 to take advantage of a discount based on terms of 3/10, net
Exercises & Problems Page 4 of 10
 MANAGEMENT ADVISORY SERVICES Working Capital Management

MULTIPLE CHOICE percent.

1. May Co. has total fixed assets of P100,000 and no current liabilities. The table below displays If sales grow by 10 percent next year, the required new financing (RNF) to finance the
its wide variation in current asset components. expansion is
1st Quarter 2nd Quarter 3I<J Quarter 4th Quarter A. P4,850,000 C. P2,650,000
Cash P 20,000 P 10,000 P 15,000 P 20,000 B. P3,000,000 D. P5,000,000
Accounts receivable 66,000 25,000 47,000 88,000
Inventory 20,000 65,000 59.000 10,000 4. The Gold Company has an inventory conversion period of 75 days, a receivables conversion
period of 38 days, and a payable payment period of 30 days. What is the length of the firm's
Total P106,000 P100,000 P121,000 P118,000 cash conversion cycle?
A. 83 days C. 113 days
If May's policy is to finance all fixed assets and half the permanent current assets with long- B. 67 days D. 45 days
term financing and rest with short time-financing, what is the level of long-term financing?
A. P68,000 C. P150,000 5. Texas Company turns out 200 calculators a day at a cost of P250 per calculator for materials
B. P100,000 D. P155,625 and variable conversion cost. It takes the firm 18days to convert raw materials into calculator.
Texas usual credit terms to its customers is 30days, and the firm generally pays its suppliers in
2. Silver Company has the following ratios: A*/S = 1.6; I*/S = 0.4: profit margin = 0.10; and 20 days. If the foregoing cycles are constant, what amount of working capital must Texas
dividend payout ratio = 0.45, or 45 percent. Sales last year were P100 million. Assuming that finance?
these ratios will remain constant and that ail liabilities increase spontaneously with increases A. P1,400,000 C. P2,400,000
in sales, what is the maximum growth rate Silver Company can achieve without having to B. P900,000 D. P1,800,000
employ nonspontaneous external funds?
*Spontaneous assets and liabilities 6. Hep Inc., has a total annual cash requirement of P9,075,000 which are to be paid uniformly.
A. 3.9 percent C. 7.8 percent Hep has the opportunity to invest the money at 24% per annum. The company spends, on the
B. 4.8 percent D. 9.6 percent average, P40 for every cash conversion to marketable securities.
What is the optimal cash conversion size?
3. Color Paint Company has plants in 3 major cities. Sales for last year were P100 million, and A. P60,000 C. P45,000
the balance sheet at year-end is similar in percentage of sales to that of previous years (and B. P55,000 D. P72,500
this will continue in the future). All assets (including fixed assets) and current liabilities will vary
directly with sales. Color Paint is already using assets at full capacity. 7. Collectrite Company sells on terms 3/10, net 30. Total sales for the year are P900,000. Forty
percent of the customers pay on the tenth day and take discounts; the other 60 percent pay,
Balance Sheet (In million pesos) on average, 45 days after their purchases. What is the average amount of receivables?
Assets Liability and Stockholders Equity A. P70,000 C. P77,200
Accounts payable and accruals P25 B. P77,500 D. P67,500
Current assets P50 Notes payable - long term 30
Common stock 15 8. Palma Company's budgeted sales for the coming year are P40,500,000 of which 80% are
Fixed assets 40 Retained earnings 20 expected to be credit sales at terms of n/30. Palma estimates that a proposed relaxation of
Total. P90 Total P90 credit standards will increase credit sales by 20% and increase the average collection period
from 30 days to 40 days. Based on a 360-day year, the proposed relaxation of credit to
Color Paint has an after-tax profit margin of 5 percent and a dividend payout ratio of 30 standards will result in an expected increase in the average accounts receivable balance of
Exercises & Problems Page 5 of 10
 MANAGEMENT ADVISORY SERVICES Working Capital Management

A. P540,000 C. P900,000 12. How much "non-free" trade credit does the firm use on average each year?
B. P2,700,000 D. P1,620,000 A. P120,000 C. P60,000
B. P90,000 D. P30,000
9. The Tempo Company has an inventory conversion period of 60 days, a receivable conversion
period of 30 days, and a payable payment period of 45 days. The Tempo's variable cost ratio 13. What is approximate cost of the "non-free" trade credit?
is 60 percent and annual fixed costs of P600,000. The current cost of capital for Tempo is A. 16 2% C. 21.9%
12%. If Tempo's annual sales are P3,375,000 and all sales are on credit, what is the firm's B. 19.4% D. 24.5%
carrying cost on accounts receivable, using 360 days year?
A. P281,250 C. P20,250 14. A company obtained a short-term bank loan of P500,000 at an annual interest rate of 8%. As a
B. P168,750 D. P56,250 condition of the loan, the company is required to maintain a compensating balance of
P100,000 in its checking account. The checking account earns interest at an annual rate of
10. Globe, Inc. is considering changing its credit terms from 2/15, net 30, to 3/10, net 30. In order 3%. Ordinarily, the company maintains a balance of P50,000 in its account for transaction
to speed collections. At present, 40 percent of Globe's customers take the 2 percent discount. purposes. What is the effective interest rate of the loan?
Under the new term, discount customers are expected to rise to 50 percent. Regardless of the A. 7.77% C. 9.44%
credit terms, half of the customers who do not take the discount are expected to pay on time, B. 8.50% D. 8.56%
whereas the remainder will pay 10 days late. The change does not involve a relaxation of
credit standards; therefore bad debt losses are not expected to rise above their present 2 Questions 15 thru 18 are based on the following information.
percent level. However, the more generous cash discount terms are expected to increase You plan to borrow P100,000 from your bank, which offers to lend you the money at a 15 percent
sales from P2 million to P2.6 million per year. nominal, or stated, rate on a 1-year loan.
Globe's variable cost ratio is 75 percent, the interest rate on funds invested in accounts
receivable is 9 percent, and the firm's income tax rate is 40 percent 15. What is the effective interest rate if the loan is discount loan?
What are the days sales outstanding (DSO) before- and after the- change of credit policy? A. 17.65% C. 17.50%
A. 27 days and 22.5 days, respectively C. 22.5 days and 27 days, respectively B. 13.00% D. 30.00%
B. 22.5 days and 21.5 days, respectively D. 21.5 days and 22.5 days respectively
16. What is the approximate effective interest rate if the loan is an add-on interest loan with 12
11. If a firm purchases raw materials from its supplier on a 2/10, n/50 term, the equivalent annual monthly payments?
effective interest (using 360-day year) of continuously giving up a cash discount and making A. 17.65% C. 20.00%
payment on the 50th day is B. 15.00% D. 26.50%
A. 14 percent C. 12.29 percent
B. 19.94 percent D. 14.69 percent 17. What is the effective interest rate if the loan is a discount loan with a 10 percent compensating
balance?
Questions 12 & 13 are based on the following information. A. 17.65% C. 17.50%
A firm buys on terms of 2/10, net 30, but generally does not pay until 40 days after the invoice date. B. 20.00% D. 26.50%
Its purchases total P1,080,000 per year.
18. Under the terms of question no.6, how much would you have to borrow to have the use of
P100,000?
A. P100,000 C. P120,000
B. P111,110 D. P133,333
Exercises & Problems Page 6 of 10
 MANAGEMENT ADVISORY SERVICES Working Capital Management

19. Three suppliers of baseball equipment offer different credit terms to City Sports. X Co. offer
terms of 1 ½ / 15, net 30. Y Enterprises offers terms of 1/10, net 30. Z Inc. offers terms of 2/10,
net 60. City Sports would have to borrow from a bank at an annual rate of 10% in order to take
any cash discounts. Which one of the following would be the most attractive for City Sports?
A. Purchase from X and pay in 30 days
B. Purchase from X, pays in 15 days, and borrows any money needed from the bank
C. Purchase from Y and pay in 30 days
D. Purchase from Z and pay in 60 days

20. Gees Pipeline, Inc., has developed plans for new pump that will allow more economical
operation of the company’s oil pipelines. Management estimates that P2,400,000 will be
required to put this new pump into operation. Funds can be obtained from a bank at 10
percent discount interest, or the company can finance the expansion by delaying to payment
to its suppliers. Presently, Gees purchases under terms of 2/10, net 40, but management
believes payment could be delayed 30 additional days without penalty; that is, payment could
be made in 70 days. Which means of financing should Gees use? (Use the approximate cost
of trade credit.)
A. Trade credit, since the cost is about 12.24 percent.
B. Trade credit, since the cost is about 3.13 percentage points less than the bank loan
C. Bank loan, since the cost is about 1.13 percent points less than trade credit
D. Bank loan, since the cost is about 3.13 percentage points less than trade credit

SOLUTIONS

Exercises & Problems Page 7 of 10

i
.127,500

2(20,000)(200
2 
ii
.1. Permanent assets = 59,200,000 (40,000,000 + 19,200,000)
2. Permanent financing = 61,900,000 (40,000,000 + 43,800,000 x 0.50)
3. Max. temporary financing = 21,900,000 (43,800,000 x 0.5)

2(20,000)(200
2 
iii
.A. P480,000 (1,200,000 – 295,000 – 425,000)
B. P18,750 (206,250 – 112,500) – 75,000

2(20,000)(200
2 
iv
. 1 2a 2b 2c
Inc in SNA 450,000. 450,000. 450,000. 300,000
Inc in RE (453,750) (311,250) (385,000) (450,000)
(3,750) 78,750 65,000 (150,000)
2(20,000)(200
2 
v
. (a) (b)
Inc in SNA 1,020,000 1,632,000
Inc in RE (630,000) (604,800)
390,000 1,027,200

2(20,000)(200
2 
vi
.A. Cash conversion cycle = 32 days (22 + 40 – 30)
B. 28.8 million (1,500 x 600 x 32)
C. 4.5 million (35 – 30) x 1,500 x 600
D. New CCC = 30 days (20 + 40 – 30)
WC 37.8 million 1,800 x 700 x 30

2(20,000)(200
2 
vii
.A. 132 days (72 + 60)
B. 102 (132 – 30)
C. 8.5 M (30 M x 102/360
D. reduce days AR (increase AR turnover), reduce days inventory(increase inventory turnover), increase days AP

2(20,000)(200
2 
viii
.72,000 (300,000 x 4.5 days x 12%) – 90,000

2(20,000)(200
2 
ix
.A. P1,500,000 (P750,000 x 2)
B. P90,000 P1,500,000 x 6%
C. P45,000 P90,000 – P45,000

2(20,000)(200
2 
x
.A. P150,000
B. P75,000
C. P18,000

2(20,000)(200
2 
xi
.A. DSO = 28 days (10 x 40%) + (40 x 60%)
B. AR = 70,000 (900,000/360 x 28)
C. AR = 55,000 DSO = 22 days (10 x 40% +30 x 60%)
 2(20,000)(200
2 
xii
.
Old New Change P&L Effect
Sales 3,000,000 3,300,000 300,000 x 60% 180,000
Bad debts %S 1.5% 3%
Bad debts 45,000 9,000 (9,000)
DSO 30 45
AR 250,000 412,500 162,500
VC ratio x 40%
Inc. in AR Inv’t 65,000 x 15% (9,750)
Inc. Inc bef tax 161,250

2(20,000)(200
2 
xiii

Old New Change P&L Effect

Sales 2,500,000 2,750,000 250,000 x 0.4 100,000
Bad debts x 2.5% (6,250)
DSO 30 45
AR 208,333 343,750 135,417
x 0.6
Inc. in AR Inv’t 81,250.20 x 12.5% (10,156.28)
Inc. Inc bef tax 83,593.72
0.6
Inc’l Net Income 50,156.23

2(20,000)(200
2 
xiv
.3,000,000
Old New Diff
Sales 10 million 10 million
Inventory turnover 2 5
Inventory 5,000,000 2,000,000 3,000,000

2(20,000)(200
2 
xv
.125,000 (1,250,000 x 10%)
Old New Diff
Cost of Sales 45 million 45,000,000
Inventory turnover 9 12
Inventory 5,000,000 3,750,000 1,250,000

2(20,000)(200
2 
xvi
.A.
Order Size # of orders Order Cost Carrying Cost Total
20,000 1 200 20,000 20,200
10,000 2 400 10,000 10,400
5,000 4 800 5,000 5,800
1,000 20 4,000 1,000 5,000

2(20,000)(200
B. 2,000 2


2(20,000)(200
xvii 2 .A. Yes, cost savings of 5,000 (300,000 x 15%) – 40,000
B. 13.33% (40/300)
C. Answer is the same


 2(20,000)(200
xviii 2 .
days X Nominal Effective
Supplier A 2/10 net 55 45 8 16.33% 17.54%
Supplier B 3/10 net 55 45 8 24.74% 27.59%
Supplier C 2/15 net 45 30 12 24.49% 27.43%
Supplier D 2/10 net 30 20 18 36.73% 43.86%


2(20,000)(200
xix 2 .
One-year 4-months
A. 12.5% 12.5%
B. 11.5625% 9.25  80 11.5625%
C. 12.28% 8.75  (100 – 8.75 – 20) 11.35%
D. 10.145% 9.5%
E. 10.88% 10.05%
F. 9.86% 9.23%


2(20,000)(200
xx 2   .A. Supplier A = 18.18% Supplier B = 16.33%
B. Borrow at 16%, pay supplier within discount period
C. 20% (16/80), Yes, forego the discount.


2(20,000)(200
xxi 2   .A. Barangay Bank = 14.12% (12/85)
Townbank = 13.44% (3.25/96.75) x 4
B. Trade discount = 22.27%
C. Barangay Bank = 117,647 (100,000  0.85)
Townbank = 103,359 (100,000  0.9675)
D. Principal = 100,000, Effective interest rate = 12%

2(20,000)(200
xxii 2     .A. 12% C. 1148% 8.75/(100 – 8.75 – 15)
B. 11.25% 9/80 D. 16% 8/50