Reference no: EM1332556
Finance: Loan Scenarios: Midland Chemical Co.
Midland Chemical Co. is negotiating a loan from Manhattan Bank and Trust. Thesmall chemical company needs to borrow $500,000.The bank offers a rate of 8¼ percent with a 20 percent compensating balancerequirement, or as an alternative, 9¾ percent with additional fees of $5,500 to coverservices the bank is providing. In either case the rate on the loan is floating (changes asthe prime interest rate changes), and the loan would be for one year.
a. Which loan carries the lower effective rate? Consider fees to be the equivalent of other interest.
b. If the loan with a 20 percent compensating balance requirement were to be paid off in 12 monthly payments, what would the effective rate be? (Principal equals amount borrowed minus the compensating balance.)
c. Assume the proceeds from the loan with the compensating balance requirement will be used to take cash discounts. Disregard part b about installment payments and use the loan cost from part a.
If the terms of the cash discount are 1.5/10, net 50, should the firm borrow the funds to take the discount?
d. Assume the firm actually takes 80 days to pay its bills and would continue to do so in the future if it did not take the cash discount. Should it take the cash discount?
e. Because the interest rate on the loans is floating, it can go up as interest rates go up. Assume that the prime rate goes up by 2 percent and the quoted rate on the loan goes up the same amount. What would then be the effective rate on the loan with compensating balances? Convert the interest to dollars as the first step in your calculation.
f. In order to hedge against the possible rate increase described in part
e, Midland decides to hedge its position in the futures market. Assume it sells $500,000 worth of 12-month futures contracts on Treasury bonds. One year later, interest rates go up 2 percent across the board and the Treasury bond futures have gone down to $488,000. Has the firm effectively hedged the 2 percent increase in interest rates on the bank loan as described in part e? Determine the answer in dollar amounts.
|
The shut down rule in the short run
: Discuss the shut down rule in the short run.
|
|
Capital budgeting for new computerized assembly line
: Propose to launch a new computerized assembly line, which costs $5,000,000, for replacing the existing assembly line.
|
|
Make a perl script that accepts the name of directory
: build a Perl script that accepts the name of directory as an argument to the script, and lists out the files in this directory that are older than 2 hours from the time the script is executed.
|
|
Explain disciplinary process
: Important information about Disciplinary process - Describe the significance of each principle and how it relates to management.
|
|
Illustrate which loan carries the lower effective rate
: Illustrate which loan carries the lower effective rate. Consider fees to be the equivalent of other interest.
|
|
Discuss the importance of grades
: Why are we so big on the concept of merit? To be sure, merit is often determined by opportunities - it easier to get better grades if you are rich and have tutors.
|
|
Zeta software-project operating cash flow
: Zeta Software is considering a new project whose data are shown below. The required equipment has a 3-year tax life, after which it will be worthless
|
|
Drugs crossing the border
: Describe the situation with the drugs crossing the border into the United States.
|
|
Design a script that processes the data
: The script calculates the number of weeks, days, and hours worked during the month, then shows the form data and the results of the calculations.
|