7

1. Cash discount (LO1) Compute the cost of not taking the following cash
discounts.
a. 2/10, net 50.
b. 2/15, net 40.
c. 3/10, net 45.
d. 3/10, net 180.

2. Cash discount decision (LO1) Regis Clothiers can borrow from its bank at 11
percent to take a cash discount. The terms of the cash discount are 2/15, net 60.
Should the firm borrow the funds?

3. Cash discount decision (LO1) Simmons Corp. can borrow from its bank at 12
percent to take a cash discount. The terms of the cash discount are 1.5/10, net 60.
Should the firm borrow the funds?

4. Effective rate of interest (LO2) Your bank will lend you $2,000 for 45 days at a
cost of $25 interest. What is your effective rate of interest?

5. Effective rate of interest (LO2) A pawn shop will lend $100 for 10 days at a cost
of $5 interest. What is the effective rate of interest?

6. Effective rate on discounted loan (LO2) Sol Pine is going to borrow $3,000 for
one year at 8 percent interest. What is the effective rate of interest if the loan is
discounted?

7. Effective rate on discounted loan (LO2) Mary Ott is going to borrow $5,000 for
90 days and pay $140 interest. What is the effective rate of interest if the loan is
discounted?

10. Dollar cost of a loan (LO2) Talmud Book Company borrows $16,000 for 30 days
at 9 percent interest. What is the dollar cost of the loan?

11. Net credit position (LO1) McGriff Dog Food Company normally takes 20 days
to pay for average daily credit purchases of $9,000. Its average daily sales are
$10,000, and it collects accounts in 25 days.
 a. What is its net credit position? That is, compute its accounts receivable and
accounts payable and subtract the latter from the former.

b. If the firm extends its average payment period from 20 days to 32 days (and
all else remains the same), what is the firm's new net credit position? Has it
improved its cash flow?

12. Compensating balances (LO2) Logan Drilling Corp. plans to borrow $200,000
for one year. Northern National Bank will lend the money at 10 percent interest
and require a compensating balance of 20 percent. What is the effective rate of
interest?

13. Compensating balances (LO2) Computer Graphics Company needs $250,000 in

14. Compensating balances and installment loans (LO2) The Dade Company is
borrowing $300,000 for one year and paying $27,000 in interest to Miami
National Bank. The bank requires a 20 percent compensating balance. What is the
effective rate of interest? What would be the effective rate if the company were
required to make 12 monthly payments to retire the loan? The principal, as used in
Formula 8–6, refers to funds the firm can effectively utilize (Amount borrowed –
Compensating balance).

17. Effective rate under different terms (LO2) Your company plans to borrow $5
million for 12 months, and your banker gives you a stated rate of 14 percent
interest. You would like to know the effective rate of interest for the following
types of loans. (Each of the following parts stands alone.)
a. Simple 14 percent interest with a 10 percent compensating balance.
b. Discounted interest.
c. An installment loan (12 payments).
d. Discounted interest with a 5 percent compensating balance.

21. Cash discount under special circumstance (LO2) Mr. Hugh Warner is a very
cautious businessman. His supplier offers trade credit terms of 3/10, net 80. Mr.
Warner never takes the discount offered, but he pays his suppliers in 70 days rather
than the 80 days allowed so he is sure the payments are never late. What is Mr.
Warner's cost of not taking the cash discount?
22. Bank loan to take cash discount (LO1 & 2) The Reynolds Corporation buys
from its suppliers on terms of 2/10, net 55. Reynolds has not been utilizing the
discounts offered and has been taking 55 days to pay its bills.
Mr. Duke, Reynolds Corporation vice president, has suggested that the company
begin to take the discounts offered. Duke proposes that the company borrow from
its bank at a stated rate of 14 percent. The bank requires a 20 percent
compensating balance on these loans. Current account balances would not be
available to meet any of this compensating balance requirement.
Do you agree with Duke's proposal?

23. Bank loan to take cash discount (LO1 & 2) In Problem 22, if the compensating
balance requirement were 10 percent instead of 20 percent, would you change
your answer? Do the appropriate calculation.

24. Bank loan to take cash discount (LO1 & 2) Neveready Flashlights, Inc., needs
$300,000 to take a cash discount of 2/10, net 70. A banker will loan the money for
60 days at an interest cost of $5,500.
a. What is the effective rate on the bank loan?
b. How much would it cost (in percentage terms) if the firm did not take the
cash discount, but paid the bill in 70 days instead of 10 days?
c. Should the firm borrow the money to take the discount?
d. If the banker requires a 20 percent compensating balance, how much must
the firm borrow to end up with the $300,000?
e. What would be the effective interest rate in part d if the interest charge for
60 days were $6,850? Should the firm borrow with the 20 percent
compensating balance? (The firm has no funds to count against the
compensating balance requirement.)

26. Competing terms from banks (LO2) Summit Record Company is negotiating
with two banks for a $100,000 loan. Fidelity Bank requires a 20 percent compensating
balance, discounts the loan, and wants to be paid back in four quarterly payments.
Southwest Bank requires a 10 percent compensating balance, does not discount the loan,
but wants to be paid back in 12 monthly installments. The stated rate for both banks is 9
percent. Compensating balances will be subtracted from the $100,000 in determining
the available funds in part a.
a. Which loan should Summit accept?
b. Recompute the effective cost of interest, assuming that Summit ordinarily
maintains $20,000 at each bank in deposits that will serve as compensating
balances.
c. Does your choice of banks change if the assumption in part b is correct?