Kentville Petroleum needs $1,000,000 to take advantage of a cash discount of 2/20, net 60. A banker will loan the money for 40 days at a total interest cost of $10,959

a) What is the annual rate on the bank loan?

b) How much would it cost (in percentage terms) if Kentville did not take the cash discount and paid the bill in 60 days instead of 20 days?

c) Should Kentville borrow the money to take the discount?

d) If the Banker requires a 20 percent compensating balance, how much must Kentville borrow to end up with the $1,000,000 cash available?

e) If Kentville could borrow from another bank at an annual rate of 10%, but they required a 20% compensating balance, what would be the effective annual interest rate on the loan?

Answer rating: 100% (QA)

Lets break down each part of the problem a To find the annual rate on the bank loan we first need to calculate the interest rate for 40 days and then ... View the full answer