Erica Stone works in an accounts payable department. She has attempted to convince her boss to take the discount on the 3/10 net 45 credit terms most suppliers offer, but her boss argues that giving up the 3% discount is less costly than a short-term loan at 14%. Prove to whoever is wrong that the other is correct. (Note: Assume a 365-day year.)  Commercial paper is usually sold at a discount. Fan Corporation has just sold an issue of 90-day commercial paper with a face value of $1 million. The firm has received initial proceeds of $978,000. (Note:  Assume a 365-day year.)

a. What effective annual rate will the firm pay for financing with commercial paper, assuming that it is rolled over every 90 days throughout the year?

 

b. If a brokerage fee of $9,612 was paid from the initial proceeds to an investment banker for selling the issue, what effective annual rate will the firm pay, assuming that the paper is rolled over every 90 days throughout the year?

  

Maximum Bank has analyzed the accounts receivable of Scientific Software, Inc. The bank has chosen eight accounts totaling $134,000 that it will accept as collateral. The bank's terms include a lending rate set at prime 3% and a 2% commission charge. The prime rate currently is 8.5%.

a. The bank will adjust the accounts by 10% for returns and allowances. It then will lend up to 85% of the adjusted acceptable collateral. What is the maximum amount that the bank will lend to Scientific Software?

b. What is Scientific Software's effective annual rate of interest if it borrows $100,000 for 12 months? For 6 months? For 3 months? (Note: Assume a 365- day year and a prime rate that remains at 8.5% during the life of the loan.)