Question

Your bank will lend you $9,600 for 30 days at a cost of $102 interest.

a. What is your annual rate of interest? (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Annual rate of interest              %

b. What is your effective annual rate? (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Effective annual rate              %

Dr. Painkiller is going to borrow $6,500 for one year at 8 percent interest.

What is the annual rate of interest if the loan is discounted? (Use 365 days in a year. Do not round intermediate calculation. Round the final answer to 2 decimal places.)

Annual rate of interest              %

The Reynolds Company buys from its suppliers on terms of 4/10, net 51. Reynolds has not been utilizing the discount offered and has been taking 62 days to pay its bills. The suppliers seem to accept this payment pattern, and Reynold’s credit rating has not been hurt.

Mr. Duke, Reynolds Company’s vice-president, has suggested that the company begin to take the discount offered. Mr. Duke proposes the company borrow from its bank at a stated rate of 22 percent. The bank requires a 10 percent compensating balance on these loans. Current account balances would not be available to meet any of this required compensating balance.

a. Calculate the cost of not taking a cash discount. (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Cost of not taking a cash discount              %

b. Calculate the annual rate of interest if the company borrows from the bank. (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Annual rate of Interest              %

c. Do you agree with Mr. Duke's proposal?

• Yes

• No

Answer 1

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