Purchase Solution

# Interest rate

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Permanent assets financing

Wicker Corporation is determining whether to support \$100,000 of its permanent current assets with a bank note or a short-term bond. The firm's bank offers a two-year note where the firm will receive \$100,000 and repay \$118,810 at the end of two years. The firm has the option to renew the loan at market rates. Alternatively, Wicker can sell 8.5 percent coupon bonds with a 2-year maturity and \$1,000 par value at a price of \$973.97. How many percentage points lower is the interest rate on the less expensive debt instrument?

##### Solution Summary

The solution explains how to calculate the interest rate on financing options

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We first find the interest rate on the bank loan. The interest rate can be found using the compound interest formula - ...

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