Homework:7-1 MyFinanceLab Homework: Working Capital Managem

Question 9,P18-11 (similar to)

Part 1 of 3

(Related to Checkpoint18.3) (Calculating the cost ofshort-term financing)You plan to borrow

$50,000

from the bank to pay for inventories for a gift shop you have just opened. The bank offers to lend you the money at 9 percent annual interest for the 6 months the funds will be needed(assume a360-day year).

a.Calculate the annualized rate of interest on the loan.

b.Inaddition, the bank requires you to maintain a 16 percent compensating balance in the bank. Because you are just opening yourbusiness, you do not have a demand deposit account at the bank that can be used to meet thecompensating-balance requirement. This means that you will have to put 16 percent of the loan amount(which you had planned to use to help finance thebusiness) in a checking account. What is the cost of the loannow?

c.In addition to thecompensating-balance requirement in part b, you are told that interest will be discounted. What is the annualized rate of interest on the loannow?