finance?!

[s. rosa]

Are there any finance majors that could help me out? I have questions on some problems (time value of money) but there's no friggin way I'm asking the professor, he thinks we're all idiots.

TIA!

[Melanie.]

Well...I'm in Financial Management right now..I might be able to help - what's your question?

[s. rosa]

Well, I have a few, but this is the one I'm stuck on right now:

"your firm sells for cash only, but it is thinking of credit, allowing customers 90 days to pay. Customers understand the time value of money, so they would all wait and pay on the 90th day. To carry these receivables, you would have to borrow funds from your bank at a nominal 12 percent, daily compounding based on a 360 day year. You want to increase your base prices by exactly enough to offset your bank interest cost. By how much should you raise your product prices?

ETA: I have the correct answer: 3.014%, but I'm confused as to how to get there..

[Melanie.]

Originally Posted by s. rosa Well, I have a few, but this is the one I'm stuck on right now: "your firm sells for cash only, but it is thinking of credit, allowing customers 90 days to pay. Customers understand the time value of money, so they would all wait and pay on the 90th day. To carry these receivables, you would have to borrow funds from your bank at a nominal 12 percent, daily compounding based on a 360 day year. You want to increase your base prices by exactly enough to offset your bank interest cost. By how much should you raise your product prices?

Oh good god. LOL.

enough to offset bank interest cost...

so your interest cost would be .12/360 which = .000333 then multiplied by 90 which is .03 for a 90 day period which is 3%...so you'd have to increase your product prices by 3% in order to offset your bank interest costs?



Does that sound right at all? Or do you think it's a more complicated answer?

ETA: Well I see the 3%...but where did the .014 come from...

[infantry honey]

you will make it through that class! i took it this last summer, it was the worst class ever. good luck to you!

[s. rosa]

I have no idea. My brain just refuses to process the numbers.

Here's the other one I was stuck on, this one might be easier: "You have saved 4,000 for a down payment on a new car. The largest mothly payment you can afford is 350. The loan would have a 12% APR based on end-of-month payments. What is the most expensive car you could afford if you finance it for 48 months? For 60 months?

The answer is: 17,290.89 and 19,734.26 but again, I can't seem to get there. Thanks so much!

[s. rosa]

Originally Posted by Melanie. Oh good god. LOL. enough to offset bank interest cost... so your interest cost would be .12/360 which = .000333 then multiplied by 90 which is .03 for a 90 day period which is 3%...so you'd have to increase your product prices by 3% in order to offset your bank interest costs? Does that sound right at all? Or do you think it's a more complicated answer? ETA: Well I see the 3%...but where did the .014 come from...

well, my prof took the .000333 to the 90th power, then subtracted one. It's got something to do with the formula for EAR, which is (1 + (Inom/m))^m -1, OR (1+Iper)^m-1

and Inom/m here = Iper, but I don't understand why you use 360 for the first m but 90 for the second. If that makes any sense at all.

[Melanie.]

Originally Posted by s. rosa I have no idea. My brain just refuses to process the numbers. Here's the other one I was stuck on, this one might be easier: "You have saved 4,000 for a down payment on a new car. The largest mothly payment you can afford is 350. The loan would have a 12% APR based on end-of-month payments. What is the most expensive car you could afford if you finance it for 48 months? For 60 months? The answer is: 17,290.89 and 19,734.26 but again, I can't seem to get there. Thanks so much!

Do you have a financial calculator? It makes it SOO Much easier...

For this one you have to hrm lemme see:

Okay got it:

interest is going to be 12% divided by 12 as it's a monthly compounding
n or number of periods is 48 for the first one, 60 for the second
PMT is going to be 350

WHen you get the present value you're going to get 13290.89 and then you ad the 4000 down payment to it for the first answer to get 17290.89

For the second one you get 15734.26 to which you add back the down payment to get 19734.26.

[Melanie.]

Originally Posted by s. rosa well, my prof took the .000333 to the 90th power, then subtracted one. It's got something to do with the formula for EAR, which is (1 + (Inom/m))^m -1, OR (1+Iper)^m-1 and Inom/m here = Iper, but I don't understand why you use 360 for the first m but 90 for the second. If that makes any sense at all.

well my accounting class used the 360 rule because some years were 365 days and some were 366...it was stupid.

My finance class is so much easier...since we're using the financial calculators and all...

Ah yeah the formula for EAR - yeah that's probably how he got the .014 for sure. I didn't use that...

[infantry honey]

you need to use your financial calculator. and pay attention to how many months, years etc. if its semiannual, annual, quarterly.. which may be later in the class youll learn about all that. break down the problem.. i think that 350 would be the present value or payment (?), because thats what you are paying at the time. 12 would be the interest rate (i/y on the calc). N would be 48, then rework the problem the same way, N would just be 60 then. so you are either solving for present value or future value.... i hope this helped a little.. i'm not very good at it but hey anything usually helps with that stuff