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# Credit standard / effecive rate

1. Caron's Canoes is considering relaxing its credit standards to encourage more sales. As a result, sales are expected to increase 15 percent from 300 canoes per year to 345 canoes per year. The average collection period is expected to increase to 40 days from 30 days and bad debts are expected to double the current 1 percent level. The price per canoe is \$850, the variable cost per canoe under the proposed plan is \$650. At the 300-unit level, the variable cost is \$700. The firm's required return on investment is 20 percent.

Evaluate the proposal and make a recommendation to Caron.

2. My firm was approached by a new bank recently. The bank stated that it would provide us with a one-year \$50,000 discount loan at 5% interest. However, the new bank requires a compensating balance equal to 10% of the face value of the loan. We have no money on deposit with this new institution at present. Determine the effective annual rate associated with this loan.
3. Answer the questions from the Kanton Case on Page 699 of the Gitman Text below. Please answer in the space provided.
Note (1) Disregard the first table with the monthly funding requirements and use the requirements Morton estimates for his "Average annual financing" table mid-page. (If you do the calculations, you will see that Morton's second table is incorrect, but we'll use these figures for our funding requirements).
Note (2) Do not use the line of credit information or the revolving loan information in questions (a) through (c). That information applies only to (d) and (e).

#### Solution Summary

The solution explains how to decide if credti standard should be relaxed and the calculation of effective rate of interest

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