Problem 6 Epoch Record Company is negotiating with two banks for a P100,000 loan. Trust Bank requires a 20 percent compensating balance, discounts the loan, and wants to be paid back in four quarterly payments. Northeast Bank requires a 10 percent compensating balance, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 9 percent. Compensating balances will be subtracted from the P100,000 in determining the available funds in part a. Required: a. Which loan should Epoch accept? b. Recompute the effective cost of interest, assuming that Epoch ordinarily maintains at each bank P20,000 in deposits that will serve as compensating balances. c. Does syour choice of banks change if the assumption in part b is correct?
Problem 6 Epoch Record Company is negotiating with two banks for a P100,000 loan. Trust Bank requires a 20 percent compensating balance, discounts the loan, and wants to be paid back in four quarterly payments. Northeast Bank requires a 10 percent compensating balance, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 9 percent. Compensating balances will be subtracted from the P100,000 in determining the available funds in part a. Required: a. Which loan should Epoch accept? b. Recompute the effective cost of interest, assuming that Epoch ordinarily maintains at each bank P20,000 in deposits that will serve as compensating balances. c. Does syour choice of banks change if the assumption in part b is correct?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:Problem 6
Epoch Record Company is negotiating with two banks for a P100,000 loan.
Trust Bank requires a 20 percent compensating balance, discounts the loan, and
wants to be paid back in four quarterly payments. Northeast Bank requires a 10
percent compensating balance, does not discount the loan, but wants to be paid
back in 12 monthly installments. The stated rate for both banks is 9 percent.
Compensating balances will be subtracted from the P100,000 in determining the
available funds in part a.
Required:
a. Which loan should Epoch accept?
b. Recompute the effective cost of interest, assuming that Epoch ordinarily
maintains at each bank P20,000 in deposits that will serve as compensating
balances.
c. Does your choice of banks change if the assumption in part b is correct?
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