P15-10 (similar to) Question Help Unsecured sources of short-term loans Personal Finance Problem John Savage has obtained a short-term loan from First Carolina Bank. The loan matures in 180 days and is in the amount of $45,000. John needs the money to cover start-up costs in a new business. He hopes to have sufficient backing from other investors by the end of the next 6 months. First Carolina Bank offers John two financing options for the $45,000 loan: a fixed-rate loan at 2.2% above the prime rate, or a variable-rate loan at 1.6% above prime. Currently, the prime rate of interest is 6.4%, and the consensus interest rate forecast of a group of economists is as follows: 60 days from today the prime rate will rise by 0.6%; 90 days from today the prime rate will rise another 1.1%; 180 days from today the prime rate will drop by 0.7%. Using the forecast prime rate changes, answer the following questions. Assume a 365-day year. a. Calculate the total interest cost over 180 days for a fixed-rate loan. b. Calculate the total interest cost over 180 days for a variable-rate loan. c. Which is the lower-interest-cost loan for the next 180 days? P15-14 (similar to) Question Help O Intergrative-Comparison of loan terms Cumberland Furniture wishes to establish a prearranged borrowing agreement with a local commercial bank. The bank's terms for a line of credit are 2.10% over the prime rate, and each year the borrowing must be reduced to zero for a 30-day period. For an equivalent revolving credit agreement, the rate is 1.70% over prime with a commitment fee of 0.6% on the average unused balance. With both loans, the required compensating balance is equal to 15% of the amount borrowed. (Note: Cumberland currently maintains 50 on deposit at the bank.) The prime rate is currently 9%. Both agreements have $17,500,000 borrowing limits. The firm expects on average to borrow $7,000,000 during the year no matter which loan agreement it decides to use a. What is the effective annual rate under the line of credit? b. What is the effective annual rate under the revolving credit agreement? (Hint: Compute the ratio of the dollars that the firm will pay in interest and commitment fees to the dollars that the firm will effectively be able to use.) c. If the firm does expect to borrow an average of half the amount available, which arrangement would you recommend for the borrower? Explain why