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Chapter 3: 6BP (page 249)
Sol Pine borrows $5,000 for one year at 13 percent interest. What is the effective rate of interest if the loan is discounted?
The effective interest rate is 14.94%.
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Guardian Inc. is trying to develop an asset financing plan. The firm has \(400,000 in temporary current assets and \)300,000 in permanent current assets. Guardian also has $500,000 in fixed assets. Assume a tax rate of 40 percent.
c. What would happen if the short- and long-term rates were reversed?
Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is \(150,000. The company can borrow \)150,000 for three years at 10 percent annual interest or for one year at 8 percent annual interest.
How much would Sauer Food Company save in interest over the three-year life of the computer system if the one-year loan is utilized and the loan is rolled over (reborrowed) each year at the same 8 percent rate? Compare this to the 10 percent three-year loan. What if interest rates on the 8 percent loan go up to 13 percent in year 2 and 18 percent in year 3? What would be the total interest cost compared to the 10 percent, three-year loan?
Orbital Communications has operating plants in over 100 countries. It also keeps funds for transactions purposes in many foreign countries. Assume in 2010 it held 150,000 kronas in Norway worth \(40,000. The funds drew 13 percent interest, and the krona increased 6 percent against the dollar. What is the value of the holdings, based on U.S. dollars, at year-end?
(Hint: Multiply \)40,000 times 1.13 and then multiply the resulting value by 106 percent.)
Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 49,000 units per year, an ordering cost of \(8 per order, and carrying costs of \)1.60 per unit.
c. What will the average inventory be?
In Problem 18, what long-term interest rate would represent a break-even point between using short-term financing as described in part a and long-term financing? (Hint: Divide the interest payments in 18a by the amount of total funds provided for the six months and multiply by 12.)
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