Philander Limited requires a bank loan of R225,000 in order to finance its operations and is considering
Question:
Philander Limited requires a bank loan of R225,000 in order to finance it’s operations and is considering options from two banks, namely Bucks and Wealth Bank. Bucks Bank will charge an interest rate on the loan at a lending rate of 2,5% above the prime rate if the loan is taken out for three months. Additionally, commission of 4,25% is charged on any advances made. The current prime rate is 5% higher than the commission percentage. Wealth Bank has offered to charge an interest rate of 10,50% provided the loan is taken out for eight months but their commission percentage (%) is 0,50% higher than that is charged by Bucks Bank on any advances made.
REQUIRED:
1. Calculate the difference in the effective annual rates of interest offered by both banks if the company borrows the funds from Bucks Bank over three months and Wealth Bank over eight months. Round off all calculations to two (2) decimal places (18)
2. The financial manager of Philander Limited is also considering making use of accruals in financing it’s business. Discuss under what circumstances the company would be justified in making use of them. (2)
Introduction to Governmental and Not for Profit Accounting
ISBN: 978-0132776011
7th edition
Authors: Martin Ives, Terry K. Patton, Suesan R. Patton