CHAPTER 17 INTERMEDIATE FINANCING I Questions 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 provisions into the term loan agreement as safeguards against default on the loan These covenants restrict the scope of the borrower’s activities 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 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 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 not fully amortize the cost of the asset II True or False True False True False True III Practical Problems PROBLEM True False False True 17-2 Solutions Manual - ManagerialAccountingandFinanceforHospitality 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, = 5.535 (Appendix B) in the equation shown on the next page A Amount of the loan PVIFA 0.09, = P1,000,000 5.535 = P180,668 = (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 Solving this problem requires rewriting the equation for annual loan payment in problem in order to determine the amount of the loan and substituting the yearly loan payment, A = P20,000, and PVIFA 0.14, = 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 The annual loan payment, P78,864.35, is calculated by substituting the amount of the loan, P250,000, and PVIFA 0.10, = 3.170 (Appendix B) in the equation below A Amount of the loan PVIFA 0.10, = P250,000 3.170 = P78,864.35 = End of Year (1) Beginning Balance (2) Loan Payment (3) Interest Payment [0.10 x (2)] (4) P250,000 196,136 136,886 71,711 P78,864 78,864 78,864 78,864 P25,000 19,614 13,689 7,171 Principal Reduction [(3) – (4)] (5) P53,864 59,250 65,175 71,693 Remaining Balance [(2) – (5)] (6) P196,136 136,886 71,711 0* * The actual remaining balance in Year 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 .. .17- 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. .. requires rewriting the equation for annual loan payment in problem in order to determine the amount of the loan and substituting the yearly loan payment, A = P20,000, and PVIFA 0.14, = 2.914 (Appendix... substituting the amount of the loan, P250,000, and PVIFA 0.10, = 3 .170 (Appendix B) in the equation below A Amount of the loan PVIFA 0.10, = P250,000 3 .170 = P78,864.35 = End of Year (1) Beginning