Harold Corporation needs to borrow 1,000,000 in order to take a cash discount from its supplier on credit terms 3/10, net 45. A banker will loan the money for 30 days at an interest cost of 28,000 (assume a 360-day year for calculations).

1 What is the effective rate on the bank loan?

2 How much would it cost (in percentage terms) if Harold did not take the cash discount, but paid the bill in 45 days instead of 10 days?

3 Should Harold borrow the money to take the discount? Explain.

4 If another banker requires a 15 percent compensating balance, how much must Harold borrow to end up with 1,000,000?

5 What would be the effective interest rate in question 4 if the interest charge for 30 days were 21,000? Since there are no funds to count against the compensating balance requirement, should Harold borrow with the 15 percent compensating balance?