
Your company plans to borrow
a. Simple 24 percent interest with a 10 percent compensating balance.
b. Discounted interest.
c. An installment loan (12 payments).
d. Discounted interest with a 5 percent compensating balance.
a.

To calculate: The effective rate of simple interest payment at 24% with a compensating balance of 10%.
Introduction:
Effective interest rate:
Also termed as annual equivalent rate, it is the rate actually charged on an investment or a loan over a specific time period.
Simple Interest:
It is the interest computed on the original amount of the loan, that is, the principal amount. It is the easiest way of calculating the interest on a loan.
Answer to Problem 17P
The effective rate of simple interest payment at 24% with a 10% compensating balance is 26.67%.
Explanation of Solution
Calculation of the effective rate of interest with a 10% compensating balance:
Working Notes:
Calculation of interest:
Calculation of the compensating balance:
b.

To calculate: The effective interest rate for the discounted interest:
Introduction:
Effective interest rate:
Also termed as annual equivalent rate, it is the rate actually charged on an investment or a loan over a specific time period.
Discounted Interest:
The loan on which the interest owed is deducted up front is termed as discount interest. The amount that the borrower receives is the net amount of interest.
Answer to Problem 17P
The effective rate of discounted interest is 31.58%.
Explanation of Solution
Calculation of the effective rate of discounted interest:
c.

To calculate: The effective rate of interest on the installment loan.
Introduction:
Effective interest rate:
Also termed as annual equivalent rate, it is the rate actually charged on an investment or a loan over a specific time period.
Answer to Problem 17P
The effective rate of interest on the installment loan is 44.31%.
Explanation of Solution
Calculation of the effective rate of interest on the installment loan:
d.

To calculate: The effective rate of discounted interest with a compensating balance of 5%.
Introduction:
Effective interest rate:
Also termed as annual equivalent rate, it is the rate actually charged on an investment or a loan over a specific time period.
Discounted Interest:
The loan on which the interest owed is deducted up front is termed as discount interest. The amount that the borrower receives is the net amount of interest.
Answer to Problem 17P
The effective rate of discounted interest with a 5% compensating balance is 33.80%.
Explanation of Solution
Calculation of the effective rate of discounted interest with a 5% compensating balance:
Working Notes:
Calculation of the compensating balance:
Want to see more full solutions like this?
Chapter 8 Solutions
EBK FOUNDATIONS OF FINANCIAL MANAGEMENT
- Don't used Ai solutionarrow_forwardLiterature Review Based Essay on Contemporary Issues of Business Ethics and Corporate Social Responsibility Essay Format Cover Page with your Name Table of Content • Introduction ⚫ Objectives ⚫ Discussion with Literature Support • Conclusion References (10+) Words Limit-3000-3500 wordsarrow_forwardPlease don't use hand ratingarrow_forward
- "Dividend paying stocks cannot be growth stocks" Do you agree or disagree? Discuss choosing two stocks to help justify your view.arrow_forwardA firm needs to raise $950,000 but will incur flotation costs of 5%. How much will it pay in flotation costs? Multiple choice question. $55,500 $50,000 $47,500 $55,000arrow_forwardWhile determining the appropriate discount rate, if a firm uses a weighted average cost of capital that is unique to a particular project, it is using the Blank______. Multiple choice question. pure play approach economic value added method subjective approach security market line approacharrow_forward
- When a company's interest payment Blank______, the company's tax bill Blank______. Multiple choice question. stays the same; increases decreases; decreases increases; decreases increases; increasesarrow_forwardFor the calculation of equity weights, the Blank______ value is used. Multiple choice question. historical average book marketarrow_forwardA firm needs to raise $950,000 but will incur flotation costs of 5%. How much will it pay in flotation costs? Multiple choice question. $50,000 $55,000 $55,500 $47,500arrow_forward
- Question Mode Multiple Choice Question The issuance costs of new securities are referred to as Blank______ costs. Multiple choice question. exorbitant flotation sunk reparationarrow_forwardWhat will happen to a company's tax bill if interest expense is deducted? Multiple choice question. The company's tax bill will increase. The company's tax bill will decrease. The company's tax bill will not be affected. The company's tax bill for the next year will be affected.arrow_forwardThe total market value of a firm is calculated as Blank______. Multiple choice question. the number of shares times the average price the number of shares times the future price the number of shares times the share price the number of shares times the issue pricearrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
