Tribal Hat Company is arranging for a P500,000 one-year loan from BDO. The bank has offered

the following alternatives:

a.A 30% interest rate, no required compensating balance, and principal plus interest due at the end of the year.

b.A 19% interest rate, with 20% required compensating balance, plus principal and interest due at the end of the year.

c.A 21% interest rate, 20% compensating balance, and principal plus interest due at the end of the year; the compensating balance earns an interest of 8% per annum.

Required:

1. Calculate the effective interest rate for each of the alternative offered by the bank.
2. Determine the best alternative offered by the bank of which you would recommend to Tribal Hat Company to avail of.