Question

​(Cost of a​ short-term bank loan​) Jimmy Hale is the owner and operator of the grain elevator in​ Brownfield, Texas, where he has lived for most of his 62 years. The rains during the spring have been the best in a​ decade, and Mr. Hale is expecting a bumper wheat crop. This has prompted him to rethink his current financing sources. He now believes he will need an additional $ 220,000 for the​ 3-month period ending with the close of the harvest season. After meeting with his​ banker, Mr. Hale is puzzling over what the additional financing will actually cost. The banker quoted him a rate of 1 percent over prime​ (which is currently 7 ​percent) and also requested that the firm increase its current bank balance of ​$4,000 up to 18 percent of the loan.

a. If interest and principal are all repaid at the end of the​ 3-month loan​ term, what is the annual percentage rate on the loan offer made by Mr.​ Hale's bank?

b. If the bank were to offer to lower the rate to prime if interest is​ discounted, should Mr. Hale accept this​ alternative? Note​: Assume a​ 30-day month and​ 360-day year.

Answer 1

ADDITIONAL FUNDS REQUIRED IS 220000

PERIOD =3 MONTHS

RATE OF INTEREST = 1% + PRIME RATE