SOLUTION

ð$500,000 _ 0:15Þ þ ð$200,000 _ 0:11Þ ¼ $97,000

Proceeds of Loan. Assume the same information as in Problem 5.4, except that interest is deducted in advance. (a) What is the amount of proceeds the company will receive at the time of the loan? (b) What is the effective interest rate?

144 SHORT-TERM FINANCING [CHAP. 5

Asif Warsi

SOLUTION

(a) Interest ¼ $70,000 _ 0:19 ¼ $13,300

Proceeds ¼ principal _ interest ¼ $70,000 _ $13,300 ¼ $56,700

(b)

Effective interest rate ¼ interest proceeds ¼

$13,300

$56,700 ¼ 23:5%

Effective Interest Rate and Compensating Balance. Wilson Corporation has a credit line of $800,000. The compensating balance requirement on outstanding loans is 14 percent, and

8 percent on the unused credit line. The company borrows $500,000 at a 20 percent interest rate. (a) What is the required compensating balance? (b) What is the effective interest rate?

SOLUTION

(a) The required compensating balance is:

Loan 0.14_$500,000 $70,000

Unused credit 0.08_$300,000 24,000

$94,000

(b)

Effective interest rate ¼ interest proceeds ¼

0:20 _ $500,000

$500,000 _ $94,000 ¼

$100,000

$406,000 ¼ 24:6%

Average Loan Balance. Wise Corporation borrows $70,000 payable in 12 monthly installments.

The interest rate is 15 percent. (a) What is the average loan balance? (b) What is the effective interest rate?

SOLUTION

(a)

Average loan balance ¼

$70,000

2 ¼ $35,000

(b) Effective interest rate ¼

0:15 _ $70,000

$35,000 ¼

$10,500

$35,000 ¼ 30%

Average Loan Balance. Assume the same information as in Problem 5.10, except that the loan is on a discount basis. (a) What is the average loan balance? (b) What is the