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FIN3702 Assignment 1 Due 6 September 2024 (Detail Answers)
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  • Working Capital Management

Answers to all the Questions 1. Appropriate collateral for a loan secured under a floating inventory lien: 3. Drill presses (Generally, equipment like drill presses is more suitable for inventory liens than items like paper clips or file cabinets.) 2. Approximate annual interest rate on the co...

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  • August 22, 2024
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  • 2024/2025
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FIN3702

Assignment 1

Semester 2

Unique No:355803

DUE 6 September 2024

, Answers to all the Questions

1. Appropriate collateral for a loan secured under a floating inventory lien:

3. Drill presses (Generally, equipment like drill presses is more suitable for
inventory liens than items like paper clips or file cabinets.)

2. Approximate annual interest rate on the commercial paper:

To find the interest rate, use the formula: 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 =
(𝐹𝑎𝑐𝑒 𝑉𝑎𝑙𝑢𝑒 − 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒)𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 ×
365𝐷𝑎𝑦𝑠 𝑡𝑜 𝑀𝑎𝑡𝑢𝑟𝑖𝑡𝑦{𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒} = \𝑓𝑟𝑎𝑐{({𝐹𝑎𝑐𝑒 𝑉𝑎𝑙𝑢𝑒} −
{𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒})}{{𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒}} \𝑡𝑖𝑚𝑒𝑠 \
𝑓𝑟𝑎𝑐{365}{{𝐷𝑎𝑦𝑠 𝑡𝑜 𝑀𝑎𝑡𝑢𝑟𝑖𝑡𝑦}}𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 =
𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒(𝐹𝑎𝑐𝑒 𝑉𝑎𝑙𝑢𝑒 − 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒) × 𝐷𝑎𝑦𝑠 𝑡𝑜 𝑀𝑎𝑡𝑢𝑟𝑖𝑡𝑦365

Here: 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 = (𝑅2,000,000 − 𝑅1,950,000)𝑅1,950,000 ×
36590 ≈ 0.11 𝑜𝑟 11%{𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒} = \
𝑓𝑟𝑎𝑐{(𝑅2,000,000 – 𝑅1,950,000)}{𝑅1,950,000} \𝑡𝑖𝑚𝑒𝑠 \𝑓𝑟𝑎𝑐{365}{90} \
𝑎𝑝𝑝𝑟𝑜𝑥 0.11 { 𝑜𝑟 } 11\%𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 = 𝑅1,950,000(𝑅2,000,000 −
𝑅1,950,000) × 90365 ≈ 0.11 𝑜𝑟 11%

𝟐. 𝟏𝟏%

3. Lenders recognize that by having an interest in collateral they can
reduce losses if the borrowing firm defaults:

3. therefore, lenders prefer to lend to customers from whom they are
able to require collateral.

4. Effective annual interest rate on the loan with a revolving credit
agreement:

The effective annual interest rate can be calculated by considering both
the interest rate and the commitment fee.

First, calculate the interest expense: 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 𝑅100,000 × 7.5% =
𝑅7,500{𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡} = 𝑅100,000 \𝑡𝑖𝑚𝑒𝑠 7.5\% = 𝑅7,500𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 =
𝑅100,000 × 7.5% = 𝑅7,500

The commitment fee on the unused portion: 𝐶𝑜𝑚𝑚𝑖𝑡𝑚𝑒𝑛𝑡 𝐹𝑒𝑒 =
(𝑅200,000 − 𝑅100,000) × 1% = 𝑅1,000{𝐶𝑜𝑚𝑚𝑖𝑡𝑚𝑒𝑛𝑡 𝐹𝑒𝑒} =
(𝑅200,000 – 𝑅100,000) \𝑡𝑖𝑚𝑒𝑠 1\% = 𝑅1,000𝐶𝑜𝑚𝑚𝑖𝑡𝑚𝑒𝑛𝑡 𝐹𝑒𝑒 =
(𝑅200,000 − 𝑅100,000) × 1% = 𝑅1,000

Effective annual interest rate is: 𝑅7,500 + 𝑅1,000𝑅100,000 × 365365 ≈
8.0%\𝑓𝑟𝑎𝑐{𝑅7,500 + 𝑅1,000}{𝑅100,000}\𝑡𝑖𝑚𝑒𝑠 \𝑓𝑟𝑎𝑐{365}{365}\
𝑎𝑝𝑝𝑟𝑜𝑥 8.0\%𝑅100,000𝑅7,500 + 𝑅1,000 × 365365 ≈ 8.0%

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