The R. Morin Construction Company needs to borrow $100,000 to help finance the cost of a new
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Alternative A—The firm’s bank has agreed to lend the $100,000 at a rate of 14 percent. Interest would be discounted, and a 15 percent compensating balance would be required. However, the compensating-balance requirement would not be binding on R. Morin because the firm normally maintains a minimum demand deposit (checking account) balance of $25,000 in the bank.
Alternative B—The equipment dealer has agreed to finance the equipment with a one-year loan. The $100,000 loan would require payment of principal and interest totaling $116,300.
a. Which alternative should R. Morin select?
b. If the bank’s compensating-balance requirement were to necessitate idle demand deposits equal to 15 percent of the loan, what effect would this have on the cost of the bank loan alternative?
Dealer
A dealer in the securities market is an individual or firm who stands ready and willing to buy a security for its own account (at its bid price) or sell from its own account (at its ask price). A dealer seeks to profit from the spread between the...
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Financial Management Principles and Applications
ISBN: 978-0133423822
12th edition
Authors: Sheridan Titman, Arthur Keown, John Martin
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