Question

Neveready Flashlights Inc. needs $374,000 to take a cash discount of 2/19, net 73. A banker will loan the money for 54 days at an interest cost of $11,300.  

a. What is the effective rate on the bank loan? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

B.How much would it cost (in percentage terms) if the firm did not take the cash discount but paid the bill in 73 days instead of 19 days? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

d. If the banker requires a 20 percent compensating balance, how much must the firm borrow to end up with the $374,000?

e-1. What would be the effective interest rate in part d if the interest charge for 54 days were $11,700? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Answer 1

a). Effective rate of interest = [Interest / Loan] x [360 / Days of the loan]

= [$11,300 / $374,000] x [360 / 54] = 3.02% x 6.67 = 20.14%

b). Cost of lost discount = [Discount% / (100 - Discount%] x

[360 / (Allowed payment days - Discount days)]

= [2% / (100% - 2%)] x [360 / (73 - 19)] = 2.04% x 6.67 = 13.61%

d). Amount needed to be borrowed = Borrowed Amount / [1 - Compensating Balance%]

= $374,000 / [1 - 0.20] = $374,000 / 0.80 = $467,500

e1). Effective rate of interest = [Interest / Loan] x [360 / Days of the loan]

= [$11,700 / $374,000] x [360 / 54] = 3.13% x 6.67 = 20.86%