Burt's Department Store needs $300,000 to take a cash discount of 3/10, net 70. A banker will loan the money for 60 days at an interest cost of $8,100.
a. What is the annual rate on the bank loan?
b. How much would it cost (in percentage terms) if Burt's did not take the cash discount and paid the bill in 70 days instead of 10 days?
c. Should Burt's borrow the money to take the discount?
d. If the banker requires a 20 percent compensating balance, how much must Burt's borrow to end up with the $300,000?
e. What would be the interest rate in part d if the interest charge for 60 days were $10,125? Should Burt's borrow with the 20 percent compensating balance? (There are no funds to count against the compensating balance requirement.)