(PJMC), a premier investment bank that offers full-brokerage services to its current and prospecting clients. One of...
Question:
(PJMC), a premier investment bank that offers full-brokerage services to its current and prospecting clients. One of the services offered by PJMC involves margin transactions, a service that allows clients and prospecting clients to borrow up to 50% of capital (money) to be invested in the equity and fixed income securities. By establishing margin accounts, PJMC increases its gross revenues through investments in accounts receivables. Below are the current and proposed new credit policies of PJMC.
Current credit policy:
Credit terms = Net 30.
Gross sales = $1,500,000.
90% (of paying customers) pay on Day 30.
10% pay on Day 35.
Bad debt losses = 2% of gross sales.
Operating cost ratio = 85%.
Cost of carrying receivables = 10%.
New credit policy:
Credit terms = 1/10, net 20.
Gross sales = $2,000,000.
60% (of paying customers) pay on Day 10.
30% pay on Day 15.
10% pay on Day 20.
Bad debt losses = 1% of gross sales.
1) Assume PJMC makes the policy change, and TICI’s Sales and Trading, Gorman Stanley and Union Brokers of Switzerland (PJMC competitors) react by making similar changes. As a result, gross sales remain at $1,500,000. How does this impact the firm’s after-tax profitability?
2) With sales remaining at $1,500,000 after the change in terms, the policy change would result in a slight incremental gain in net income of ______________________________?
The margin loan contract between a prospecting client and the brokerage firm is called the hypothecation agreement. If the notional principal on the loan is $100,000 with 5.75% Discount Interest and 50% Compensating Balance (i.e., the investor’s equity in the transaction)
a. what is the required face value of the loan at origination? =
b. Interest payment is? = $5,750
c. The compensating balance (i.e., the margin amount) is? = $50,000
d. Usable funds? = $50,000
e. Periodic interest rate? =
f. EAR? =
Expert Answer:
A Given are the details of two policies of a financing institution It is required to find solutions regarding the transactions based on two policies The given details are as under POLICY 1 CURRENT Cre... View the full answer
