CASE 3 (25 points)

Hazel Corporation needs to borrow 700,000 in order to take a cash discount from its supplier on credit terms 2/10, net 40. A banker will loan the money for 30 days at an interest cost of 34,000. Assume a 360-day year for your calculations.

Instructions:

3.1 What is the effective rate on the bank loan? (5 points)

3.2 How much would it cost (in percentage terms) if Hazel did not take the cash discount, but paid the bill in 40 days instead of 10 days? (5 points)

3.3 Should Hazel borrow the money to take the discount? Explain. (5 points) 3.4 If another banker requires a 15 percent compensating balance, how much must Hazel borrow to end up with 700,000? (5 points)

3.5 What would be the effective interest rate in question 3.4 if the interest charge for 30 days were 12,000? Since there are no funds to count against the compensating balance requirement, should Hazel borrow with the 15 percent compensating balance? (5 points)