Finance Questions Essay
1. Community Hospital has annual net patient revenues of $150 million. At the present time, payments received by the hospital are not deposited for six days on average. The hospital is exploring a lockbox arrangement that promises to cut the six days to one day. If these funds released by the lockbox arrangement can be invested at 8 percent, what will the annual savings be? Assume the bank fee will be $2,000 per month.
2. St. Luke’s Convalescent Center has $200,000 in surplus funds that it wishes to invest in marketable securities. If transaction costs to buy and sell the securities are $2,200 and the securities will be held …show more content…
Lockbox arrangement will earn interest for 5 days
(As payment received by the hospital are not deposited for 6 days. Lock box arrangement will cut the 6 days to 1 day).
Interest rate = 8%
Bank fee = $2,000 per month
So, interest earned = $150 million *(5/365)*8% = $164,384
Annual bank fee = $2000*12 = $24,000
Hence, annual savings = $164,384 - $24,000 = $140,384
2. St. Luke’s Convalescent Center has $200,000 in surplus funds that it wishes to invest in marketable securities. If transaction costs to buy and sell the securities are $2,200 and the securities will be held for three months, what required annual yield must be earned before the investment makes economic sense?
Surplus fund = $200,000
Transaction cost = $2,200
Holding period = 3 months
So, yield should be minimum $2,200.
Let minimum required annual yield = r%
So, $200,000*(3/12)*r% = $2,200
50,000*r% = 2,200 r% = 2,200/50,000 = 4.40%
Thus, minimum required annual yield = 4.40%
3. Your firm is considering the following three alternative bank loans for $1,000,000:
Assume that you would normally not carry any bank balance that would meet the 20 percent compensating balance requirement. What is the rate of annual interest on each loan?
a) 10 percent loan paid at year end with no compensating balance Annual interest rate = 10%
b) 9 percent loan paid at year end with a 20 percent compensating balance
Annual interest rate =