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Chapter 3: 17BP_b (page 251)

Your company plans to borrow $13 million for 12 months, and your banker gives you a stated rate of 24 percent interest. You would like to know the effective rate of interest for the following types of loans. (Each of the following parts stands alone.)

b. Discounted interest.

Short Answer

Expert verified

The effective interest rate is 31.57%.

Step by step solution

01

Information provided in the question

Loan amount = $13,000,000

Loan term = 1 year

Interest rate = 24%

02

Calculation of interest payable

The interest payable is $3,120,000.

Interestpayable=Interest×Principal=24%×$13,000,000=$3,120,000

03

Calculation of effective interest rate on the loan

The effective interest rate is 31.57%.

Effectiverate=InterestPrincipal-Interest×DaysinyearDaysloanisoutstanding=$3,120,000$13,000,000-$3,120,000×360360=31.57%

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Most popular questions from this chapter

Assume that Hogan Surgical Instruments Co. has \(2,500,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 18 percent, but with a high-liquidity plan, the return will be 14 percent. If the firm goes with a short-term financing plan, the financing costs on the \)2,500,000 will be 10 percent, and with a long-term financing plan, the financing costs on the $2,500,000 will be 12 percent. (Review Table 6-11 for parts a, b, and c of this problem.)

a. Compute the anticipated return after financing costs with the most aggressive asset financing mix.

b. Compute the anticipated return after financing costs with the most conservative asset financing mix.

c. Compute the anticipated return after financing costs with the two moderate approaches to the asset financing mix.

d. Would you necessarily accept the plan with the highest return after financing costs? Briefly explain.

Bombs Away Video Games Corporation has forecasted the following monthly sales:

January

\(100,000

February

\)93,000

March

\(25,000

April

\)25,000

May

\(20,000

June

\)35,000

July

\(45,000

August

\)45,000

September

\(55,000

October

\)85,000

November

\(105,000

December

\)123,000

Total annual sales

\(756,000

Bombs Away Video Games sells the popular Strafe and Capture video games. It sells for \)5 per unit and costs $2 per unit to produce. A level production policy is followed. Each month’s production is equal to annual sales (in units) divided by 12.

Of each month’s sales, 30 percent are for cash and 70 percent are on account. All accounts receivable are collected in the month after the sale is made.

a. Construct a monthly production and inventory schedule in units. Beginning inventory in January is 25,000 units. (Note: To do part a, you should work in terms of units of production and units of sales.)

How is a cash budget used to help manage current assets?

What are three theories for describing the shape of the term structure of interest rates (the yield curve)? Briefly describe each theory.

Explain why the bad debt percentage or any other similar credit-control percentage is not the ultimate measure of success in the management of accounts receivable. What is the key consideration?
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