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Comparison of loan terms

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Cumberland Furniture wishes to establish a prearranged borrowing agreement with a local commercial bank. The bank's terms for a line of credit are 3.30% over the prime rate, and each year the borrowing must be reduced to zero for a 30-day period. For an equivalent revolving credit agreement, the rate is 2.80% over prime with a commitment fee of 0.50% on the average unused balance. With both loans, the required compensating balance is equal to 20% of the amount borrowed. (Note: Cumberland currently maintains $0 on deposit at the bank.) The prime rate is currently 8%. Both agreements have $4 million borrowing limits. The firm expects on average to borrow $2 million during the year no matter which loan agreement it decides to use.

a. What is the effective annual rate under the line of credit?
b. What is the effective annual rate under the revolving credit agreement?
c. If the firm does expect to borrow an average of half the amount available, which arrangement would you recommend for the borrower? Explain why.

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Follow the link to watch the video - and answer the following questions:
1. Elaine Gaughran, Vice President of Human Resources, explains that TerraCycle hires mostly recent college graduates. Why? What are the advantages and disadvantages of this hiring strategy?
TerraCycle wants management that thinks outside the boundaries. The advantages of hiring college graduates are that they think outside the boundaries. Also, they don't know how a corporate company. Finally, they are easy to ...

Solution Summary

A comparison of loan terms are examined.