Harper Corporation needs 750,000 to take a cash discount of 5/15, net 40. A banker will loan
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Question:
Harper Corporation needs €750,000 to take a cash discount of 5/15, net 40. A banker will loan the money for 25 days at an interest cost of €19,100. Assume a 360-day year for your calculations.
Instructions:
- What is the effective rate on the bank loan?
- How much would it cost (in percentage terms) if Harper did not take the cash discount, but paid the bill in 40 days instead of 15 days?
- Should Harper borrow the money to take the discount? Explain.
- If another banker requires a 20 percent compensating balance, how much must Harper borrow to end up with €750,000?
- What would be the effective interest rate in part d if the interest charge for 25 days were €13,300? Since there are no funds to count against the compensating balance requirement, should Harper borrow with the 20 percent compensating balance?
Related Book For
Foundations of Financial Management
ISBN: 978-1259194078
15th edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen
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