Ajax Box Company is negotiating with two banks for a $100,000 loan. Midland Bank requires a 20 percent compensating balance, discounts the loan, and wants to be paid back in four quarterly payments. Central Bank requires a 10 percent compensating balance and does not discount the loan, but it wants to be paid back in 12 monthly installments. The stated rate at both banks is 8 percent. Compensating balances and any discounts will be subtracted from the $100,000 in determining the available funds in part a.

a. Which loan should Ajax accept?

multiple choice 1

• Midland bank

• Central bank

b. Recompute the annual cost of interest, assuming Ajax ordinarily maintains $20,000 at each bank in deposits that will serve as compensating balances. (Use 365 days in a year. Do not round intermediate calculations. Round the final answers to 2 decimal places.)

	Annual Interest rate
Midland Bank	%
Central Bank	%

c-1. How much did the compensating balances inflate the percentage interest costs? (Use 365 days in a year. Do not round intermediate calculations. Round the final answers to 2 decimal places.)

	Compensating balances
Midland Bank	%
Central Bank	%

c-2. Does your choice of banks change if the assumption in part b is correct?

multiple choice 2

• Yes

• No