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# Assignment #15 answers - Chapter 19 Question 11 a If the...

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Chapter 19 Question 11 a. If the loan is annual, for every \$100 of stated loan amount, the borrower receives \$94 and repays \$100 in a year. The effective annual interest rate is: interest/loan amount = 6/94 = .0638 = 6.38%. b. If the loan is monthly, then the effective annual rate is 1 1 annual interest rate n n 1 = 1 1 .06 12 12 1 = (1/.995) 12 1 = .0620 = 6.20% Question 12 a. Consider a loan of \$100. The interest over a one year period will be \$6. The amount actually available is \$75. Therefore, the effective annual rate is \$6/\$75 = .08 = 8%. b. The firm will pay interest of 6%/12 = .5% per month. If the loan amount has a stated balance of \$100, interest is \$.50 per month. The effective annual interest rate is ( 1 + actual interest paid borrowed funds available ) n 1 = ( 1 + \$.50 \$75 ) 12 1 = .0830, or 8.30% Chapter 20 Question 9 a. Optimal initial cash balance, from the Baumol model, equals Q = 2 200,000 20 .02 = \$20,000 So the firm should sell securities for cash 200,000/20,000 = 10 times per year.

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b. The average cash balance is \$20,000/2 = \$10,000.
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