Short Term Financing Paper 6


Dexter Products receives $25,000 worth of merchandise from its major supplier on the 15th and 30th of each month. The goods are sold on terms of 1/15, net 45, and Dexter has been paying on the net due date and forgoing the discount. A local bank offered Dexter a loan at an interest rate of 10%. What will be the net annual savings to Dexter if it borrows from the bank and utilizes the funds to take advantage of the trade discount?


Dudley Products is given terms of 2/10, net 45 by its suppliers. If Dudley forgoes the cash discount and instead pays the suppliers 5 days after the net due date with no penalty, what is the annual interest rate cost (using a 360-day year)?


A firm is given payment terms of 3/10, net 90 and forgoes the discount and pays on the net due date. Using a 360-day year and ignoring the effects of compounding, what is the effective annual interest rate cost?


Gates, Inc., has been offered a 1-year loan by its commercial bank. The instrument is a discounted note with a stated interest rate of 9%. If Gates needs $300,000 for use in the business, what should the face value of the note be?


Lang National Bank offered a 1-year loan to a commercial customer. The instrument is a discounted note with a nominal rate of 12%. What is the effective interest rate to the borrower?


Keller Products needs $150,000 of additional funds over the next year in order to satisfy a significant increase in demand. A commercial bank has offered Keller a 1-year loan at a nominal rate of 8%, which requires a 15% compensating balance. How much would Keller have to borrow, assuming it would need to cover the compensating balance with the loan proceeds?


Approximately what amount of compensating balance would be required for a stated interest rate of 10% to equal an effective interest rate of 10.31% on a $100,000,000 1-year loan?


The effective annual interest rate to the borrower of a $100,000 1-year loan with a stated rate of 7% and a 20% compensating balance is


What is the effective annual interest rate for a 1-year $100 million loan with a stated interest rate of 8.00%, if the lending bank requires a non-interest bearing compensating balance in the amount of $5 million?


Which one of the following could be used to provide security to the lender in an inventory financing situation?


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