Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
14th Edition
ISBN: 9780133507690
Author: Lawrence J. Gitman, Chad J. Zutter
Publisher: PEARSON
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Chapter 16, Problem 16.13P

Compensating balance versus discount loan Weathers Catering Supply Inc. needs to borrow $150,000 for 6 months. State Bank has offered to lend the funds at a 9% annual rate subject to a 10% compensating balance. (Note: Weathers currently maintains $0 on deposit in State Bank.) Frost Finance Co. has offered to lend the funds at a 9% annual rate with discount-loan terms. The principal of both loans would be payable at maturity as a single sum.

  1. a. Calculate the effective annual rate of interest on each loan.
  2. b. What could Weathers do that would reduce the effective annual rate on the State Bank loan?
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Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)

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