Cost of Loan/Discount
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1. Total Cost: An oil company arranged a $10,000,000 revolving credit agreement with a group of small banks. The firm paid an annual commitment fee of one-half of one percent of the unused balance of the loan commitment. On the used portion of the loan, it paid 1.5 percent above prime for the funds actually borrowed on an annual, simple interest basis. The prime rate was at 9 percent for the year. If it borrowed $6,000,000 immediately after the agreement was signed and repaid the loan at the end of one year, what was the total dollar cost of the loan agreement for one year?
2. Annual Cost: Suppose the credit terms offered to your firm by your suppliers are 2/10, net 30 days. Out of convenience, your firm is not taking discounts, but is paying after 20 days, instead of waiting until Day 30. You point out that the nominal cost of not taking the discount and paying on Day 30 is approximately 37 percent. But since your firm is not taking discounts and is paying on Day 20, what is the effective annual cost of your firm's current practice, using a 365-day year?
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Solution Summary
The solution has two problems - one relating to cost of loan and the second one relating to the cost of not taking the cash discount. It provides simple calculations for each of these problems.
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1. The total dollar cost is the interest paid + the commitment fee. The amount borrowed is 6,000,000 and the unused portion is ...
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