Short Term Financing Paper 6

1

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?






2

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)?






3

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?






4

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?






5

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?






6

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?






7

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?






8

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






9

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?






10

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






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