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    CH 18 HW 1 Answer

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    Emmi Turunen
    This document contains two questions regarding calculating the annual percentage rate (APR) for lines of credit that require compensating balances. The first question provides details of a $300,000 line of credit with a 12% annual interest rate and 10% compensating balance requirement. It asks to calculate the APR under different scenarios. The second question describes a construction company that needs to borrow $100,000 to purchase equipment and is considering loans from their bank or the equipment dealer.

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    CH 18 HW 1 Answer

    Uploaded by

    Emmi Turunen
    47 views2 pages
    This document contains two questions regarding calculating the annual percentage rate (APR) for lines of credit that require compensating balances. The first question provides details of a $300,000 line of credit with a 12% annual interest rate and 10% compensating balance requirement. It asks to calculate the APR under different scenarios. The second question describes a construction company that needs to borrow $100,000 to purchase equipment and is considering loans from their bank or the equipment dealer.

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    12. Ch 18 HW 1 answer

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    This document contains two questions regarding calculating the annual percentage rate (APR) for lines of credit that require compensating balances. The first question provides details of a $300,000 line of credit with a 12% annual interest rate and 10% compensating balance requirement. It asks to calculate the APR under different scenarios. The second question describes a construction company that needs to borrow $100,000 to purchase equipment and is considering loans from their bank or the equipment dealer.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    47 views2 pages

    CH 18 HW 1 Answer

    Uploaded by

    Emmi Turunen
    This document contains two questions regarding calculating the annual percentage rate (APR) for lines of credit that require compensating balances. The first question provides details of a $300,000 line of credit with a 12% annual interest rate and 10% compensating balance requirement. It asks to calculate the APR under different scenarios. The second question describes a construction company that needs to borrow $100,000 to purchase equipment and is considering loans from their bank or the equipment dealer.

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    12.

    Ch 18 Working Capital HW1


    Question 1
    Calculating APR for a Line of Credit
    M&M Beverage Company has a $300,000 line of credit that requires a compensating balance
    equal to 10 percent of the loan amount. The rate paid on the loan is 12 percent per annum,
    $200,000 is borrowed for a six-month period, and the firm does not currently have a deposit with
    the lending bank. The dollar cost of the loan includes the interest expense as well as the
    opportunity cost of maintaining an idle cash balance in the compensating balance (10% of the
    loan). To accommodate the cost of the compensating balance requirement, assume that the added
    funds will have to be borrowed and simply left idle in the firm’s checking account.
    Answer the followings find subsets of each questions.
    a. Interest = B x Quoted rate x Time
    b. APR = Annual percentage rate
    Interest amount($) 1
    c. APR = usable amount ($)
    X Time

    𝐴𝑃𝑅 m
    d. EAR = (1 + 𝑚
    ) -1

    1. What is the annual rate on this loan if there was no compensating balance
    requirement?
    2. What is the annual rate on this loan with compensating balance requirement?
    3. What is the annual rate on this loan if there was no compensating balance
    requirement but the bank requires firm to pay interest rate in advance?
    4. What is the annual rate on this loan with compensating balance requirement and
    the bank also requires firm to pay interest rate in advance?
    Question 2
    12. Ch 18 , no.9, page 639
    The R. Morin Construction Company needs to borrow $100,000 to help finance the cost of a
    new $150,000 hydraulic crane used in the firm’s commercial construction business. The
    crane will pay for itself in one year, and the firm is considering the following alternatives for
    financing its purchase:
    Alternative A – The firm’s bank has agreed to lend the $100,000 at a rate of 14 percent.
    Interest would be discounted and a 15 percent compensating balance would be required.
    However, the compensating-balance requirement would not be binding on R. Morin because
    the firm normally maintains a minimum demand deposit (checking account) balance of
    $25,000 in the bank.
    Alternative B – The equipment dealer has agreed to finance the equipment with a one-year
    loan. The $100,000 loan would require payment of principal and interest $116,300.
    Which alternative should R. Morin select?
    If the bank’s compensating-balance requirement were to necessitate idle demand
    deposits equal to 15 percent of the loan, what effect would this have on the cost of the
    bank loan alternative?

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