"11. Carey Company is borrowing $200,000 for one year at 12 percent from Second IntrastateBank. The bank requires a 20 percent compensating balance. What is the effective rate ofinterest? What would the effective rate be if Carey were required to make 12 equal monthlypayments to retire the loan? The principal, as used in Formula 8–6, refers to funds the firmcan effectively utilize (Amount borrowed – Compensating balance).8-11. Solution:Carey CompanyEffective rate of interest with 20% compensating balance =Interest Days in the year (360) × Principal - Compensating balance Days loan is outstanding $24,000 360 $24,000 360= ×= ×=15%$200,000 - $40,000 360 $160,000 360 Effective rate for installment loan with compensating balance2×× Annual no. payments Interest Total no. of payments + 1 × Principal ( ) 2×× 12 $24,000 =12+× 1 $200,000- $40,000 ( ) ( ) $576,000 $576,000 = = = 27.69% 13 ×$160,000 $2,080,000 S8-11 12. Capone Child Care Centers, Inc., plans to borrow $250,000 for one year at 10 percent fromthe Chicago Bank and Trust Company. There is a 20 percent compensating balancerequirement. Capone keeps minimum transaction balances of $18,000 in the normal courseof business. This idle cash counts toward meeting the compensating balance requirement.What is the effective rate of interest?8-12. Solution:Capone Child Care Centers, Inc.Effective rate of interest =Interest Days in the year (360) × Principal - Compensating balance Days loan is outstanding $25,000 360 $25,000 ×= =11.47% $250,000 - $32,000* 360 $218,000 *Compensating Balance = 20% × 250,000 = $50,000Normal Funds =18,000Restricted Compensating Balance $32,000S8-12 13. The treasurer of Neiman Supermarkets is seeking a $30,000 loan for 180 days fromWrigley Bank and Trust. The stated interest rate is 10 percent and there is a 15 percentcompensating balance requirement. The treasurer always keeps a minimum of $2,500 in the firm’s checking account. These funds could count toward meeting any compensatingbalance requirement. What is the effective rate of interest on this loan?8-13. Solution:Neiman SupermarketsEffective rate of interest =Interest* Days in the year (360) × Principal - Compensating balance Days loan is outstanding $1,500 360 = × = 5.36%×= 2 10.72%$30,000 - $2,000** 180 180 * 10%×$30,000×= $1,500( ) 360 **Compensating Balance = 15% × 30,000 = $4,500Normal Funds = 2,500Restricted Compensating Balance $2,000S8-13 14. Tucker Drilling Corp. plans to borrow $200,000. Northern National Bank will lend themoney at one-half percentage point over the prime rate of 8½ percent (9 percent total) andrequires a compensating balance of 20 percent. Principal in this case refers to funds that the firm can effectively use in the business.What is the effective rate of interest? What would the effective rate be if TuckerDrilling were required to make four quarterly payments to retire the loan?8-14. Solution:Tucker Drilling Corp.Effective rate of interest with 20% compensating balance = $18,000/($200,000 – $40,000) = $18,000/$160,000 = 11.25%Installment Loan with compensating balance2× 4×$18,000 = = $144,000 / $800,000 =18.0%5 ×$160,000 ( ) S8-14 15. Your company plans to borrow $5 million for 12 months, and your banker gives you astated rate of 14 percent interest. You would like to know the effective rate of interest forthe following types of loans. (Each of the following parts stands alone.) a. Simple 14 percent interest with a 10 percent compensating balance. b. Discounted interest. c. An installment loan (12 payments). d. Discounted interest with a 5 percent compensating balance.8-15. Solution:a. Simple interest with a 10% compensating balance$700,000 $700,000×1= =15.56%$5,000,000 - $500,000 $4,500,000 b. Discounted interest$700,000 $700,000×1= =16.28%$5,000,000 - $700,000 $4,300,000 c. An installment loan with 12 payments2×× 12 $700,000 $16,800,000= = 25.85%13 ×$5,000,000 $65,000,000 d. Discounted interest with a 5% compensating balance$700,000/($5,000,000 – $700,000 – $250,000) = 17.28%S8-15 "