A term loan is a business loan with a maturity of more than one year.. These loans are privately negotiable between the borrower and the lender.. The lender incorporates covenants or pro
Trang 1CHAPTER 17 INTERMEDIATE FINANCING
I Questions
1 A term loan is a business loan with a maturity of more than one year These loans are privately negotiable between the borrower and the lender
2 The lender incorporates covenants or provisions into the term loan agreement as safeguards against default on the loan These covenants restrict the scope of the borrower’s activities
3 The major advantages of term loans include speed, flexibility, low issuance costs, and the avoidance of possible nonrenewal of short-term loans
The disadvantages of term loans include restrictive loan provisions, the use of collateral in some cases, higher costs than short-term loans, and the cash drain from making annuity payments
4 A lease is an agreement in which the owner or lessor of an asset agrees to let another party or lessee use the asset in return for specified payments
5 The basic types of leases are operating and financial Operating leases are cancelable, include maintenance and service in the lease payment, have a contract life shorter than the economic life of the asset, and do not fully amortize the cost of the asset
II True or False
5 True
III Practical Problems
PROBLEM 1
Trang 217-2 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations
(a) The annual loan payment, A, of P180,668 is found by substituting the amount of the loan, P1,000,000, and PVIFA 0.09, 8 = 5.535 (Appendix B) in the equation shown on the next page
(b) The total interest paid on the loan is approximately P445,344
Total payments (8 x P180,668) P1,445,344
Amount of the loan (principal) 1,000,000
Total interest P 445,344
PROBLEM 2
Solving this problem requires rewriting the equation for annual loan payment in problem 1 in order to determine the amount of the loan and substituting the yearly loan payment, A = P20,000, and PVIFA 0.14, 4 = 2.914 (Appendix B), in the new equation as follows:
Amount of the loan = (A) (PVIFA 0.14, 4)
= (P20,000) (2.914) = P58,280
PROBLEM 3
1 The annual loan payment, P78,864.35, is calculated by substituting the amount
of the loan, P250,000, and PVIFA 0.10, 4 = 3.170 (Appendix B) in the equation below
2.
End of
Year
(1)
Beginning Balance (2)
Loan Payment (3)
Interest Payment [0.10 x (2)]
(4)
Principal Reduction [(3) – (4)]
(5)
Remaining Balance [(2) – (5)] (6)
A
=
Amount of the loan PVIFA 0.09, 8 = P1,000,0005.535 = P180,668
A
=
Amount of the loan PVIFA 0.10, 4 = P250,0003.170 =
P78,864.35
Trang 3* The actual remaining balance in Year 4 is P18 (P71,711 – P71,693), which
is due to rounding errors Without rounding errors, the remaining balance would be exactly zero.
Interest is based on the declining balance of the loan Since the payments remain constant, the reduction in principal would be exactly zero