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Financial Management Problem Set

8. Compute the annual approximate interest cost of not taking a discount using the following scenarios. What conclusion can be drawn from the calculations?
- 2/10 net 20
- 2/10 net 30
- 2/10 net 40
- 2/10 net 50
- 2/10 net 60

9. On January 2, 20X1, City Hospital established a line of credit with First Union National Bank. The terms of the line of credit called for a $200,000 maximum loan with an interest of 11 percent. Then compensating balance requirement is 15 percent of the total line of credit (with no additional fees charged).

10. What is the effective interest rate for City Hospital if 50 percent of the total amount were used during the year?

11. How would the answer to part of a change if the additional fees were $500?

12. How would the answer to part of a change if the additional fees were $1,000?

Solution Preview

8. Compute the annual approximate interest cost of not taking a discount using the following scenarios. What conclusion can be drawn from the calculations?

Approximate Interest rate = Discount %/(1-discount %)*365/(# of days until full payment is due - last day of discount)

- 2/10 net 20
Approximate Interest rate = 2%/(1-2%)*365/(20-10)=74.49%

- 2/10 net 30
Approximate Interest rate = 2%/(1-2%)*365/(30-10)=37.24%

- 2/10 net 40
Approximate Interest ...

Solution Summary

The solution discusses the step-by-step answers to the financial management problem sets.

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