Unit quiz: Measuring Cost, Cash and Return Before Comparing Anything

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Question 1

A broker tells a borrower that a $12,000 loan at an assumed 6 percent over 24 monthly payments will cost about $1,440 of interest, because 6 percent of $12,000 for two years is $1,440. A reviewer builds the schedule instead. What does the schedule show, and by how much does the broker's method overstate the cost?The level payment is $531.85, total payments are $12,764.34 and total interest is $764.34, so the flat method overstates the cost by $675.66 because interest is charged on a balance that falls each monthThe schedule confirms about $1,440, because the rate applies to the original principal and the term is exactly two years

Question 2

A commercial advance of $10,000 carries a factor rate of 1.25 and is repaid in twelve equal monthly payments of $1,041.67. A summary sheet states the cost as 25 percent for the year. A reviewer discounts the payment schedule against the amount advanced. What annualised figure does the reviewer obtain, and why does it differ?About 25 percent, which is the correct annual figure because the total repaid exceeds the amount advanced by exactly 25 percentThe monthly rate that equates twelve payments of $1,041.67 to $10,000 is 3.6119 percent, which annualises to about 43.34 percent, because the borrower holds progressively less of the money as the advance is repaid

Question 3

A $40,000 facility for 36 months at an assumed 8 percent nominal carries a 2.5 percent arrangement fee and a $300 documentation charge, so the borrower receives $38,700 and pays $1,253.45 a month. What is the all-in cost against the money received, and what annualised rate does that imply?Total payments are $45,124.37 against $38,700 received, an all-in cost of $6,424.37 or 16.60 percent of the amount received, which annualises to about 10.26 percent when the payment schedule is discounted against net proceedsThe all-in cost is $5,124.37, or 12.81 percent of the amount approved, and the annualised rate is 8 percent

Question 4

A trading month shows $66,000 invoiced and $58,900 collected, expenses recognised of $47,500 including $1,200 of depreciation, payables up by $2,300, and $4,100 of inventory bought for cash. The owner says a month with $18,500 of profit cannot have a cash problem. Build both figures and identify the bridge.Cash from operations is $18,500 because the payables increase and the depreciation add-back exactly cancel the inventory purchaseProfit is $18,500 and cash from operations is $10,800, a gap of $7,700 explained by $7,100 of new receivables, offset by the $2,300 payable increase and the $1,200 depreciation add-back, and reduced by the $4,100 inventory purchase

Question 5

A firm reports current assets of $96,000 including $41,000 of inventory, current liabilities of $62,000, total liabilities of $315,000, total assets of $520,000, earnings before interest and taxes of $92,000 and interest of $23,000. Of the liabilities, $180,000 is floating. Compute the four measures and the effect of a two percentage point rate rise on the coverage measure.The current ratio is 1.55 and the quick ratio is 0.89, debt-to-assets is 60.6 percent with debt-to-equity of 1.54, times interest earned is 4.0 times, and a two point rise on $180,000 adds $3,600 of interest, lowering coverage to 3.46 timesTimes interest earned stays at 4.0 times because the added interest is a financing cost that is excluded from earnings before interest and taxes

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