Problem 8-24 Bank loan to take cash discount [LO1, 2]

Neveready Flashlights Inc. needs $375,000 to take a cash discount of 2/13, net 74. A banker will loan the money for 61 days at an interest cost of $10,800.

a.	What is the effective rate on the bank loan? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Effective rate of interest

%

b.	How much would it cost (in percentage terms) if the firm did not take the cash discount but paid the bill in 74 days instead of 13 days? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Cost of not taking a cash discount

%

c.

Should the firm borrow the money to take the discount?

	No
	Yes

d.	If the banker requires a 20 percent compensating balance, how much must the firm borrow to end up with the $375,000?

Amount to be borrowed

$

e-1.	What would be the effective interest rate in part d if the interest charge for 61 days were $14,400? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Effective rate of interest

%

e-2.

Should the firm borrow with the 20 percent compensating balance requirement? (The firm has no funds to count against the compensating balance requirement.)

	Yes
	No