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I II Part 1 of 5 Points: 0 of 1 Save (Cost of short-term financing) The R. Morin Construction Company needs to borrow $120,000 to
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Part 1 of 5 Points: 0 of 1 Save (Cost of short-term financing) The R. Morin Construction Company needs to borrow $120,000 to help finance the cost of a new $168,000 hydraulic crane used in the firm's commercial construction business. The crane will pay for itself in 1 year, and the firm is considering the following alternatives for financing its purchase: Alternative A--The firm's bank has agreed to lend the $120,000 at a rate of 14 percent. Interest would be discounted, and a 15 percent compensating balance would be required. However, the compensating-balance requirement would not be binding on R. Morin because the firm normally maintains a minimum demand deposit (checking account) balance of $30,000 in the bank Alternative 8 --The equipment dealer has agreed to finance the equipment with a 1-year loan. The $120,000 loan would require payment of principal and interest totaling $140,700 a. Which alternative should R. Morin select? b. If the bank's compensating-balance requirement were to necessitate idle demand deposits equal to 15 percent of the loan, what effect would this have on the cost of the bank loan alternative? or a. Which alternative should R. Morin select? The cost of alternative A would be % (Round to two decimal places.) = points Homework (similar to Part 1 of 2 Points: 0 of 1 Save (Cost of short-term bank loan) On July 1, 2018, the Southwest Forging Corporation arranged for a line of credit with the First National Bank (FNB) of Dallas. The terms of the agreement call for a $110,000 maximum loan with interest set at 2 percent over prime. In addition, the firm has to maintain a 17 percent compensating balance in its demand deposit account throughout the year. The prime rate is currently 10 percent. Note: Interest is not paid in advance (discounted). a. If Southwest normally maintains a $18,700 to $29,700 balance in its checking account with FNB of Dallas, what is the effective cost of credit under the line-of-credit agreement when the maximum loan amount is used for a full year? b. Compute the effective cost of credit if the firm borrows the compensating balance and the maximum possible amount under the loan agreement. Again, assume the full amount of the loan is outstanding for a whole year. a. If Southwest normally maintains a $18,700 to $29,700 balance in its checking account with FNB of Dallas, what is the effective cost of credit, or APR, under the Ine-of-credit agreement when the maximum loan amount is used for a full year? % (Round to two decimal places.) II
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