BUSI-320 Corporate Finance-2013 Fall-B assignment- 4

Question
1. Problem 8-1 Cash discount [LO1]

Compute the cost of not taking the following cash discounts.

(a)

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3/14, net 55. (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places . Omit the “%” sign in your response.)

Cost of lost discount

%

(b)

2/18, net 55. (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the “%” sign in your response.)

Cost of lost discount

%

(c)

3/19, net 55. (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the “%” sign in your response.)

Cost of lost discount

%

(d)

4/15, net 150. (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the “%” sign in your response.)

Cost of lost discount

%

2.Problem 8-2 Cash discount decision [LO1]

Regis Clothiers can borrow from its bank at 17 percent to take a cash discount. The terms of the cash discount are 3/19, net 45.

(a)

Compute the cost of not taking the cash discount. (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the “%” sign in your response.)

Cost of not taking a cash discount

(b)

Should the firm borrow the funds?

3.Problem 8-5 Effective rate of interest [LO2]

A pawn shop will lend $111 for 11 days at a cost of $13 interest.

What is the effective rate of interest? (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the “%” sign in your response.)

Effective rate

4.Problem 8-7 Effective rate on discounted loan [LO2]

Mary Ott is going to borrow $9,800 for 75 days and pay $171 interest.

What is the effective rate of interest if the loan is discounted? (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the “%” sign in your response.)

Effective rate on discounted loan

5.Problem 8-8 Prime vs. LIBOR [LO2]

Dr. Ruth is going to borrow $1,800 to help write a book. The loan is for one year and the money can either be borrowed at the prime rate or the LIBOR rate. Assume the prime rate is 8 percent and LIBOR 2.5 percent less. Also assume there will be a $55 transaction fee with LIBOR (this amount must be added to the interest cost with LIBOR).

Which loan has the lower effective interest cost? (Use 360 days in a year.)

6.Problem 8-9 Foreign borrowing [LO2]

Gulliver Travel Agencies thinks interest rates in Europe are low. The firm borrows euros at 9 percent for one year. During this time period the dollar falls 16 percent against the euro.

What is the effective interest rate on the loan for one year? (Omit the “%” sign in your response.)

Effective interest rate

%

7.Problem 8-10 Dollar cost of a loan [LO2]

Talmud Book Company borrows $19,900 for 45 days at 10 percent interest.

What is the dollar cost of the loan? (Use 360 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “$” sign in your response.)

Cost of loan

$

8.Problem 8-11 Net credit position [LO1]

McGriff Dog Food Company normally takes 23 days to pay for average daily credit purchases of $9,380. Its average daily sales are $10,070, and it collects accounts in 30 days.

(a)

What is its net credit position?(Omit the “$” sign in your response.)

Net credit position

$

(b-1)

If the firm extends its average payment period from 23 days to 35 days (and all else remains the same), what is the firm’s new net credit position?(Negative amount should be indicated by a minus sign. Omit the “$” sign in your response.)

Net credit position

$

(b-2)

Has it improved its cash flow?

9.Problem 8-13 Compensating balances [LO2]

Computer Graphics Company needs $288,960 in funds for a project.

(a)

With a compensating balance requirement of 16 percent, how much will the firm need to borrow?(Omit the “$” sign in your response.)

Amount to be borrowed

$

(b)

Given your answer to part a and a stated interest rate of 10 percent on the total amount borrowed, what is the effective rate on the $288,960 actually being used?(Round your answer to 2 decimal places. Omit the “%” sign in your response.)

Effective rate

10.Problem 8-14 Compensating balances and installment loans [LO2]

The Dade Company is borrowing $395,000 for one year and paying $32,200 in interest to Miami National Bank. The bank requires a 22 percent compensating balance. The principal refers to funds the firm can effectively utilize (Amount borrowed ? Compensating balance).

(a)

What is the effective rate of interest?(Use 360 days in a year. Omit the “%” sign in your response.)

Effective rate

%

(b)

What would be the effective rate if the company were required to make 12 monthly payments to retire the loan?(Round your answer to 2 decimal places. Omit the “%” sign in your response.)

Effective rate

%

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