Use two decimal places in your answers ( please show work ) 1. A firm plans to i

Question

Use two decimal places in your answers ( please show work )

1. A firm plans to issue $5,000,000 of commercial paper for 30 days. A dealer will issue the paper at $4,985,000 at a fee of $2,000 in advance. What is the effective annual rate?

2. A firm has agreed to borrow $750,000 at a simple interest rate of 6% for 30 days to meet its short-term funding needs. The bank charges a loan processing fee of $1,000. What is the effective annual rate on this loan?

3. Assume a trade creditor offers you terms of 2/10 net 40. a. What is the effective annual cost of forgoing the discount? b. If the firm=s bank charges 14% on loans, would you take the trade credit discount?

4. A firm has established a revolving line of credit for $900,000 with a bank at a rate of prime plus 2%. There is an annual fee of 1/2% on any unused funds. Interest is discounted on loans. Prime was 5% when the agreement was made. Assume the firm decides to take down the line for $500,000 for 60 days when the prime is at 6%. What is the effective annual rate?

5. A firm has $500,000 in accounts receivable. A commercial bank will accept these accounts receivable as collateral and will advance the firm 75% of the accounts receivable amount on loan at 6%. The bank charges a $5,000 credit checking fee. The firm will use the agreement for 90 days. What is the effective annual rate?

6. A firm needs full use of $2,000,000 to purchase a new machine. A bank has agreed to loan at 9% discounted interest for 180 days. The bank requires a .25% compensating balance. The bank charges fees in advance of $300. a. How much will the firm need to borrow? b. What will be the effective annual rate on the loan?

7. A firm has $900,000 in inventory qualifying for a short-term loan with a warehouse receipt. A commercial bank will accept this warehousing agreement and inventory as collateral and will advance 80% of the value of the inventory on loan at 6%. The bank charges $5,000 upfront for the agreement. The firm will use the borrowing for 60 days. What is the effective annual rate on the borrowing?

Explanation / Answer

1. The effective rate is 5,000,000 - 4,985,000 = 15,000

Fee = 2000

So total cost = 15000 + 2000 = 17,000

Interest rate is 17,000 /5,000,000 = 0.0034 per month or 30 days

So effectiveinterest rate =(1+0.0034 )^12 = 0.04157 = 4.16%

So effective annual interest rate = 4.16%

2. The laon is at an interest of 6% for 30 days (Simple interest). So annual interest = 6* 12 = 72%

The loan processing fee is 1000/750000 = 0.00133 = 0.1333%

So the effecitve annual rate = 72.13%

3. The effecitve annual cost of forgoing the discount is  2/10 net 40. = 2/(100-2) * 365/(40-10) = 2/98*365/30 = 24.83%

The cost of loan is 14%. Since forgoing the discount will cost you more, you will take the trade discount

4. The line of credit is 7% (5 +2 )for 10 months on 900,000 and 6% for (6+2) for 2 months on 500,000

So effective annaul rate is 7*10/12 + 8*2/12 + 0.5 = 7.667 = 7.66

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