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Assignment #15 answers

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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