Reference no: EM132914914

Questions -

Q1. Little Kimi Clothiers can borrow from its bank at 13 percent to take a cash discount. The terms of the cash discount are 2/18 net 55.

a. Compute the cost of not taking the cash discount.

b. Should the firm borrow the funds?

Q2. The treasurer of Brandon Blue Sox is seeking a $36,000 loan for 180 days from the Brandon Credit Union. The stated interest rate is 10 percent and there is a 15 percent compensating balance requirement. The treasurer always keeps a minimum of $3,100 in the firm's chequing account. These funds could count toward meeting any compensating balance requirements.

What is the annual rate of interest on this loan?

Q3. If you borrow $5,300 at $400 interest for one year, what is your annual interest cost for the following payment plan? (Round the final answers to 2 decimal places.)

Effective rate

a. Annual payment %

b. Semiannual payments %

c. Quarterly payments %

d. Monthly payments %

Q4. The Reynolds Company buys from its suppliers on terms of 3/10, net 50. Reynolds has not been utilizing the discount offered and has been taking 60 days to pay its bills. The suppliers seem to accept this payment pattern, and Reynold's credit rating has not been hurt.

Mr. Duke, Reynolds Company's vice-president, has suggested that the company begin to take the discount offered. Mr. Duke proposes the company borrow from its bank at a stated rate of 18 percent. The bank requires a 12 percent compensating balance on these loans. Current account balances would not be available to meet any of this required compensating balance.

a. Calculate the cost of not taking a cash discount.

b. Calculate the annual rate of interest if the company borrows from the bank.

c. Do you agree with Mr. Duke's proposal?

Q5. Neveready Flashlights Inc. needs $470,000 to take a cash discount of 2/10, net 60. A banker will loan the money for 50 days at an interest cost of $7,200.

a. What is the annual rate on the bank loan?

b. How much would it cost (in percentage terms) if the firm did not take the cash discount, but paid the bill in 60 days instead of 10 days?

c. Should the firm borrow the money to take the discount?

d. If the banker requires a 15 percent compensating balance, how much must the firm borrow to end up with the $470,000?

e-1. What would be the effective interest rate in part d if the interest charge for 50 days were $10,300?

e-2. Should the firm borrow with the 20 percent compensating balance?