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1. If the prompt payment discount is foregone, which of the following credit terms implies the customer is borrowing at a rate that is less than 20% (assume 365 days per year)?
a. 2/10, net 30
b. 1.5/10, net 30
c. 1/10, net 20
d. 3/20, net 75
e. all of the above imply borrowing at 20% or more.
2. Hatter Enterprises has current assets of $15 million and a current ratio of 3. The bank has offered Hatter a $13 million revolving credit agreement at an interest rate of 10%. Hatter will have to pay a commitment fee of 1% on the unused balance. Assuming that current assets and the current ratio remain constant, calculate the total annual financing charge associated with this agreement if Hatter borrows enough to support all of its net working capital.
a. $1,030,000
b. $1,240,000
c. $1,310,000
d. $1,390,000
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