Short-Term Financing Analysis Malone Feed and Supply Company buys on terms of 1/10, net 30, but it has not been taking discounts and has actually been paying in 60 rather than 30 days. Assume that the accounts payable are recorded at full cost, not net of discounts. Malone's balance sheet follows (thousands of dollars):

Now, Malone's suppliers are threatening to stop shipments unless the company begins making prompt payments (that is, paying in 30 days or less). The firm can borrow on a 1-year note (call this a current liability) from its bank at a rate of 1.5%, discount interest, with a 20% compensating balance required. (Malone's $50,000 of cash is needed for transactions; it cannot be used as part of the compensating balance.)
a. How large would the accounts payable balance be if Malone takes discounts? If it does not take discounts and pays in 30 days?
b, How large must the bank loan be if Malone takes discounts? If Malone doesn't take discounts?
c. What are the nominal and effective costs of non-free trade credit? What is the effective cost of the bank loan? Based on these costs, what should Malone do?
d. Assume Malone forgoes the discount and borrows the amount to needed to become current on its payables. Construct a pro forma balance sheet based on this decision.
e. Now assume that the $300,000 shown on the balance sheet is recorded net of discounts. How much would Malone have to pay its suppliers to reduce its accounts payables to $250,000? If Malone's tax rate is 40%, what is the effect on its net income due to the lost discount when it reduces its accounts payable to $250,000? How much would Malone have to borrow? Construct a pro forma balance sheet based on thisscenario.

Transcribed Image Text:

$ 500 50 50 S 600 150 1.250 Total liabilites and cquity $2,000 S 50 Accounts receivable450 750 S1,250 Accounts payable Notes payable Accruals Cash Inventory Current labilities Long-term ceht Common equity Current assets Fixed assets Total assets 750 $2000