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

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1.
Problem
8-1 Cash discount [LO1]






Compute the cost of not taking the
following cash discounts.








(a)



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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