1) 2/10 net 40 can be defined as 2% discount will be given if the loan is repaid in 10 days otherwise the full amount should be payable in 40 days.
Given: if the amount is paid within 10 days, there will be 2% discount. Hence, 2% is charged for a 30 day period. For 1 year (365 days), the effective cost will be:
(365/30)∗0.02 =0.24333
Effective Cost = 24.33%
2) Calculation of effective interest on borrowings with minimum compensation balance:
Effective interest rate = $700/($10,000 - $2,000) = $700/$8,000 = 0.0875 = 8.75%
3)
.The effective rate is higher than the stated interest rate because of the compensatory balance.
There are three alternatives to increase each financing alternative is for a full year.) (1) Fore...
14ト 10y. 1. A firm requires $ 0.5 million in financing for a 60-day period. Three alternatives are being considered. Which alternative should be selected? o( a. Establish a line of credit with the bank at an interest rate of 14 percent. The bank will require a 10 percent compensating balance. b. Forgo trade discounts from suppliers on terms of 3/10, net 70. c. Issue commercial paper for 60 days at a 500,000 K 26S ) discount of 2.65 percent....
(Related to Checkpoint 18.2) (Calculating the cost of short-term financing) The R. Morin Construction Company needs to borrow $120,000 to help finance the cost of a new $180,000 hydraulic crane used in the firm's commercial construction business. The crane will pay for itself in one year, and the firm is considering the following alternatives for financing its purchase: Alternative A. The firm's bank has agreed to lend the $120,000 at a rate ofb13percent. Interest would be discounted, and a 15...
(Related to Checkpoint 18.2) (Calculating the cost of short-term financing) The R. Morin Construction Company needs to borrow $90,000 to help finance the cost of a new $135,000 hydraulic crane used in the firm's commercial construction business. The crane will pay for itself in one year, and the firm is considering the following alternatives for financing its purchase: Alternative A. The firm's bank has agreed to lend the $90,000 at a rate of 12 percent. Interest would be discounted, and...
Exercises #11 1. Xtra Corporation needs $50,000 for three months to finance its working capital. The company has arranged a short-term loan with a bank. The bank charges 8% annual interest rate with interest paid in advance. The bank also requires 5% of the borrowed amount as a compensating balance. Assume Xtra does not have money to serve as a compensating balance and pay interest upfront 1.1 How much Xtra have to borrow? 1.2 Find effective cost of bank loan...
Cost of short-term financing) The R. Morin Construction Company needs to borrow $90 comma 000 to help finance the cost of a new $126 comma 000 hydraulic crane used in the firm's commercial construction business. The crane will pay for itself in 1 year, and the firm is considering the following alternatives for financing its purchase: Alternative Along dashThe firm's bank has agreed to lend the $90 comma 000 at a rate of 12 percent. Interest would be discounted, and...
Need the EAR for each alternative
please
Hand-to-Mouth (H2M) is currently cash-constrained, and must make a decision about whether to delay paying one of its suppliers, or take out a loan. They owe the supplier $11,000 with terms of 2/10 Net 40, so the supplier will give them a 2% discount if they pay by today (when the discount period expires). Alternatively, they can pay the full $11,000 in one month when the invoice is due. H2M is considering three...
Evaluating Alternative Notes
A borrower has two alternatives for a loan: (1) issue a
$360,000, 90-day, 7% note or (2) issue a $360,000, 90-day note that
the creditor discounts at 7%. Assume a 360-day year.
Evaluating Alternative Notes A borrower has two alternatives for a loan: (1) issue a $360,000, 90-day, 7% note or 2) issue a $360,000, 90-day note that the creditor discounts at 7%. Assume a 360-day year. a. Calculate the amount of the interest expense for each...
Short term Financing 1) Your firm issues 20-year bonds. This type of financing would be most appropriate for which of the following activities? A) The support of accounts receivable B) The construction of a new warehouse C) The support of accounts payable D) The financing of inventory 2) Your firm borrows money from the bank on a short-term note due in 9 months. This type of financing would be most appropriate for which of the following activities? A) The support...
t The Treadwater Bank wants to raise $1,000,000 using three-month commercial for Treadwater? Magna Corporation has an issue of commercial paper with a face value of $1,000,000 and a maturity of six months Magna received net proceeds of $973,710 when it sold the paper what is the effective annual rate of the paper to Magna? Assume that the prime rate is 8 0% APR compounded quarterly H ν much dollar sa gs n ntres d Tr h ater and Magna...
Fleda's Beauty Company has $200,000 of total assets and earns 20 percent interest and taxes on these assets. The ratio of total debts to total assets (or DR been set at 50 percent. The interest rate on short-term debt is 7 percent, while the interest rate on long-term debt is 10 percent. A conservative policy calls for only long-term debt with no short-term debt; an intermediate policy calls for 50 percent short-term debt and 50 percent long-term debt; and an...