Quiz 6 - a. If the bank requires a 20% minimum compensating...

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FIN 360 Quiz #6 Name: _Jeremy Pflug ______________ 1. Slipshod Machine Tool Co. owes $40,000 to one of its suppliers. The supplier has offered a trade discount of 2/10 net 30. Slipshod can borrow the funds from either of two banks: First City Bank offers a simple payment loan for 20 days with interest $400; Upstart Bank offers a discounted loan for 20 days with interest $320. a. What is the cost of failing to take the discount? 2% / 100 – 2% * 360 / 30 – 10 = 0.02 * 18 = 37% b. What is the cost of failing to take the discount if Slipshod can stretch its payment to 45 days? 2% / 100 – 2% * 360 / 45 – 10 = 0.02 * 10.285 = 20.5% c. What is the effective interest rate on each of the loans? First City Bank – 400 / 40,000 * 360 / 20 = 0.01 * 18 = 18% Upstart Bank – 320 / 40,000 * 360 / 20 = 0.008 * 18 = 14.4% d. Should Slipshod take the discount? If so, which bank should Slipshod obtain the funds from? Yes – Slipshod should take the Upstart Bank discount. 2. Kramerica Industries is seeking to borrow $100,000 from National Bank.
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Unformatted text preview: a. If the bank requires a 20% minimum compensating balance, how much will Kramerica be able to effectively use? The bank will borrow $125,000 to use 100,000. b. If the bank quotes a rate of 8%, what is the effective rate on this loan with the compensating balance requirement? 8% / 1 20% = 10% c. If Kramerica needs to use $100,000, how much must be borrowed? 100,000 / 1 20% = 125,000 3. Vandelay Industries is borrowing $60,000 from Morehead State Bank. The total interest is $12,000. The loan will be paid by making equal monthly payments for the next three years. What is the effective rate of interest on this installment loan? 2 * 12 * 12,000 / 37 * 60,000 = 288,000 / 2,220,000 = 13% 4. A company plans to borrow $2 million for a year. The stated interest rate is 12%. If there is a 20% compensating balance requirement, what is the effective interest rate? 12% / (1- 20%) = 15% is the effective interest rate....
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This note was uploaded on 12/17/2011 for the course MBA 500 taught by Professor Dr.jones during the Spring '11 term at Morehead State.

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