"22. Columbus Shipping Company is negotiating with two banks for a $100,000 loan. Bankcorpof Ohio requires a 20 percent compensating balance, discounts the loan, and wants to bepaid back in four quarterly payments. Cleveland Bank requires a 10 percent compensatingbalance, does not discount the loan, but wants to be paid back in 12 monthly installments.The stated rate for both banks is 10 percent. Compensating balances and any discounts willbe subtracted from the $100,000 in determining the available funds in part a. a. Which loan should Columbus accept? b. Recompute the effective cost of interest, assuming Columbus ordinarily maintains$20,000 at each bank in deposits that will serve as compensating balances. c. How much did the compensating balances inflate the percentage interest costs? Doesyour choice of banks change if the assumption in part b is correct?8-22. Solution:Columbus Shipping Companya. Bankcorp of Ohio:Effective interest rate 2× 4×$10,000 = $100,000- $20,000- $10,000×+ 4 1 ( ) ( ) = $80,000/$350,000 = 22.86% Cleveland Bank:Effective interest rate 2×× 12 $10,000 =$100,000- $10,000× 12+1 ( ) ( ) =$240,000 / $1,170,000 = 20.51% Choose Cleveland Bank since it has the lowest effective cost.S8-21 8-22. (Continued)b. The numerators stay the same as in part (a) but thedenominator increases to reflect the use of more moneybecause balances are already maintained at both banks.Bankcorp of Ohio:Effective rate=$80,000/($100,000-× $10,000) 5=17.78%Cleveland Bank:Effective rate = $240,000/($100,000 × 13) = 18.46%c. The compensating balance assumption changed interest ratesas follows: Bankcorp ClevelandInterest Cost with Comp/Bal. 22.86% 20.51%Without Comp/Bal. 17.78% 18.46%Difference in cost 5.08% 2.05%If compensating balances are maintained at both banks in thenormal course of business, then Bankcorp of Ohio’s loanbecomes cheaper than Cleveland Bank’s loan.S8-22 23. Texas Oil Supplies sells to the 12 accounts listed below.Average Age ofReceivable Balancethe Account overAccount Outstanding the Last YearA................ $ 50,000....................35 daysB................ 80,000....................25C................ 120,000....................47D................ 10,000....................15E................ 250,000....................35F................ 60,000....................51G................ 40,000....................18H................ 180,000....................60I................ 15,000....................43J................ 25,000....................33K................ 200,000....................41L................ 60,000....................28J&J Financial Corporation will lend 90 percent against account balances that haveaveraged 30 days or less; 80 percent for account balances between 30 and 40 days; and 70 percent for account balances between 40 and 45 days. Customers that take over 45 daysto pay their bills are not considered as adequate accounts for a loan.The current prime rate is 7 percent, and J&J Financial Corporation charges 2 percentover prime to Texas Oil Supplies as its annual loan rate. a. Determine the maximum loan for which Texas Oil Supplies could qualify. b. Determine how much one month’s interest expense would be on the loan balancedetermined in part a.S8-23 8-23. Solution:Texas Oil Suppliesa. 3-30 days AmountB$80,000D10,000G40,000L60,000 Total 190,000 loan % 90% loan $171,00031-40 daysAmountA$ 50,000E250,000J25,000 Total $325,000 loan% 80% loan $260,00041-45 daysAmountI$ 15,000K200,000 Total $215,000 loan % 70% loan $150,500Maximum Loan = $171,000 + $260,000 + $150,500 = $581,500b. Loan balances $ 581,500Interest, 9% annual0.75% per monthOne month’s interest $4,361.25S8-24 24. The treasurer for Thornton Pipe and Steel Company wishes to use financial futures tohedge her interest rate exposure. She will sell five Treasury futures contracts at $105,000per contract. It is July and the contracts must be closed out in December of this year. Long-term interest rates are currently 7.4 percent. If they increase to 8.5 percent, assumethe value of the contracts will go down by 10 percent. Also if interest rates do increase by1.1 percent, assume the firm will have additional interest expense on its business loans andother commitments of $60,800. This expense, of course, will be separate from the futurescontracts. a. What will be the profit or loss on the futures contract if interest rates go to 8.5percent?b. Explain why a profit or loss took place on the futures contracts.c. After considering the hedging in part a, what is the net cost to the firm of theincreased interest expense of $60,800? What percent of this increased cost did thetreasurer effectively hedge away?d. Indicate whether there would be a profit or loss on the futures contracts if interestrates went down.S8-25 "