Neveready Flashlights Inc. needs $304,000 to take a cash discount of 2/19, net 7
ID: 2767830 • Letter: N
Question
Neveready Flashlights Inc. needs $304,000 to take a cash discount of 2/19, net 74. A banker will loan the money for 55 days at an Interest cost of $12,400. What Is the effective rate on the bank loan? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) How much would it cost (in percentage terms) if the firm did not take the cash discount but paid the bill in 74 days instead of 19 days? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Should the firm borrow the money to take the discount? No Yes If the banker requires a 20 percent compensating balance, how much must the firm borrow to end up with the $304,000? What would be the effective interest rate in part d if the interest charge for 55 days were $9,500? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Should the firm borrow with the 20 percent compensating balance requirement? (The firm has no funds to count against the compensating balance requirement.) Yes NoExplanation / Answer
a.The effective rate of Interest = ($12,400/$304,000)*(360Days/55days) = 26.70%
b.Cost of lost discount = (2%/98%)*(360Days/74days-19days) = (2%/98%)*(360Days/55days) = 13.36%
c.No, because .Cost of lossing discount 13.36% is less than cost of borrowing 26.70%.
d.Amount to be borrwed = $304,000/(1.00-.20) =$304,000/0.8= $380,000
e.The effective rate of Interest = ($9,500/$304,000)*(360Days/55days) = 20.45%
No you should not borrow with 20% compensating balance requirement, because .Cost of lossing discount 13.36% is less than cost of borrowing 20.45%.