Which loan has the lower effective interest cost

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Reference no: EM131977538

1. Dr. Ruth is going to borrow $5,200 to help write a book. The loan is for one year and the money can either be borrowed at the prime rate or the LIBOR rate. Assume the prime rate is 10 percent and LIBOR 1.0 percent less. Also assume there will be a $100 transaction fee with LIBOR (this amount must be added to the interest cost with LIBOR).

a. What is the effective interest rate on the LIBOR loan? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

b. Which loan has the lower effective interest cost?

Prime

LIBOR

2. McGriff Dog Food Company normally takes 24 days to pay for average daily credit purchases of $9,650. Its average daily sales are $10,570, and it collects accounts in 27 days.

a. What is its net credit position?

b-1. If the firm extends its average payment period from 24 days to 30 days (and all else remains the same), what is the firm's new net credit position? (Negative amount should be indicated by a minus sign.)

b-2. Has the firm improved its cash flow?

Yes

3. Del Monty will receive the following payments at the end of the next three years: $15,000, $18,000, and $20,000. Then from the end of the 4th year through the end of the 10th year, he will receive an annuity of $21,000 per year.

At a discount rate of 16 percent, what is the present value of all three future benefits? Use Appendix B and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Reference no: EM131977538

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