Calculate the effective cost of the given trade credit terms

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Reference no: EM131488862

Question: 1. (Cost of trade credit) Calculate the effective cost of the following trade credit terms when payment is made on the net due date:

2. (Annual percentage yield) Compute the cost of the trade credit terms in Problem 15-3 using the compounding formula, or effective annual rate.

3. (Cost of short-term bank loan) On July 1, 2015, the Southwest Forging Corporation arranged for a line of credit with the First National Bank (FNB) of Dallas. The terms of the agreement call for a $100,000 maximum loan with interest set at 1 percent over prime. In addition, the firm has to maintain a 20 percent compensating balance in its demand deposit account throughout the year. The prime rate is currently 4.5 percent.

a. If Southwest normally maintains a $20,000 to $30,000 balance in its checking account with FNB of Dallas, what is the effective cost of credit under the lineof-credit agreement when the maximum loan amount is used for a full year?

b. Compute the effective cost of credit if the firm borrows the compensating balance and the maximum possible amount under the loan agreement. Again, assume the full amount of the loan is outstanding for a whole year.

Reference no: EM131488862

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