Question

Neveready Flashlights Inc. needs $350,000 to take a cash discount of 3/18, net 72. A banker wil dan the money for 54 days at an interest cost of $14,500 a. What is the effective rate on the bank loan? Use a 360-day year. Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places) Effective rate of interest b. How much would it cost in percentage terms) f the firm did not take the cash discount but paid the bil in 72 days instead of 18 days? (Use a 360-day year. Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places) Cost of not taking a cash discount c. Should the firm borrow the money to take the discount? No d. If the banker requires a 20 percent compensating balance, how much must the firm borrow to end up with the $369,000 Amount to be borrowed

Answer 1

Solution Part a) Effective rate on bank Loan Effective bank cost 11 + - Interest Borrowing 360 Net Days of borrowing 1 + - 14500 359000 1.0404 30.21% 360 54 6.66667 - Net Days of borrowing 72-18 54 = Hence, Effective rate on bank Loan is 30.21% Part b) Effective annual cost if donot take discount Effective annual cost E elements ] [ Receber o credit ]. 1 Discount % + - 1-Discount % 360 Net Days of credit + 3% 1 + 7 | V 3% 97.00% 1.0309 22.51% 360 54 6.66667 Here, Net Days of credit = 72-18 54 Hence, Effective Annual Cost is 22.51% Part c) Should firm borrow No, firm should not borrow as effective cost of borrowing is more. Part d) Borrowing required if compensating balance is 20% Amount to be borrowed = Amount required (1-compensating balance%) 359000 80% 448750 Hence, Firm must borrow $448750 Note: We are allowed to answer on upto four sub-part of one question