# FM27 12 - takes discounts and it reduces A/P to \$83.33 so...

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Bank Loan : 15% Discount Loan with 20% compensating balance. Assume the firm doesn’t take discounts so it needs \$250 and borrows \$384.62. (The cost will be the same regardless of how much the firm borrows.) 0 1 | | 384.62 -384.62 -57.69 Discount interest +76.92 -76.92 Compensating balance -307.70 250.00 Answers and Solutions: 27 - 12 With a financial calculator, input the following data, N = 1, PV = 250, PMT = 0, FV = -307.70, and then solve for I = 23.08%. Just to show you that it doesn’t matter how much the firm borrows, assume the firm
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Unformatted text preview: takes discounts and it reduces A/P to \$83.33 so it needs \$416.67 cash and borrows \$641.03. 0 1 | | 641.03 -641.03 -96.15 Discount interest +128.21-128.21 Compensating balance -512.82 416.67 With a financial calculator, input the following data, N = 1, PV = 416.67, PMT = 0, FV = -512.82, and then solve for I = 23.08%. Because the cost of nonfree trade credit is less than the cost of the bank loan, Malone should forge discounts and reduce its payables only to \$250,000....
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## This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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