Question

Burt’s Department Store needs $684,000 to take a cash discount of 2.50/10, net 80. A banker will loan the money for 70 days at an interest cost of $15,400.

a. What is the annual rate on the bank loan? (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Annual rate             %

   

b. How much would it cost (in percentage terms) if Burt’s did not take the cash discount and paid the bill in 80 days instead of 10 days? (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Cost of not taking a cash discount             %

c. Should Burt’s borrow the money to take the discount?

• No

• Yes

d. If the banker requires a 10 percent compensating balance, how much must Burt’s borrow to end up with the $684,000? (Round the final answer to the nearest whole dollar.)

Amount to be borrowed           $

e-1. What would be the interest rate in part d if the interest charge for 70 days were $20,500? (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Annual rate             %

e-2. Should Burt’s borrow with the 10 percent compensating balance? (There are no funds to count against the compensating balance requirement.)

• Yes

• No

Answer 1

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