Question

Liz's Health Food Store has estimated monthly financing requirements for the next six months as follows: January February March $8,000 2,000 3,000 April May June $8,000 9,000 4,000 Short-term financing will be utilized for the next six months. Projected annual interest rates are: January February March 8.00 9.00 12.08 April May June 15.04 12.08 12.08 1970 a. Compute total dollar interest payments for the six months. To convert an annual rate to a monthly rate, divide by 12. (Round the final answer to 2 decimal places. Do not round intermediate calculation.) Total dollar interest payments $ b-1. Compute the total dollar interest payments if long-term financing at 12 percent had been utilized throughout the six months. Assume a long term rate is locked in on an interest-only loan. Total dollar interest payments -2. If long-term financing at 12 percent had been utilized throughout the six months, would the total-dollar interest payments be larger or smaller? 340 OSmaller Larger

Answer 1

a) Calculation of Total Dollar Interest Payment for 6 Months Particulars Monthly Financing Requirements Annual Interest Rate Monthly Interest Rate (Annual Rate / 12) Interest Payment Jan $8,000 8% 0.67% $53.6 Feb $2,000 9% 0.75% $15 Mar $3,000 12% 1.00% $30 Apr $8,000 15% 1.25% $100 May $9,000 12% 1.00% $90 Jun $4,000 12% 1.00% $40 Total Interest Payment $328.6 b) 1 Calculation of Total Dollar Interest Payment for 6 Months Particulars Monthly Financing Requirements Annual Interest Rate Monthly Interest Rate (Annual Rate / 12) Interest Payment Jan $8,000 12% 1.00% $80 Feb $2,000 12% 1.00% $20 Mar $3,000 12% 1.00% $30 Apr $8,000 12% 1.00% $80 May $9,000 12% 1.00% $90 Jun $4,000 12% 1.00% $40 Total Interest Payment $340 b) 2 Total Dollar Interest payment will be higher if long term financing at 12% had been utilized throughout the six months