ArticPalmTree Ltd. is evaluating the following two independent short-term financing arrangements. What is the annual percentage cost...

ArticPalmTree Ltd. is evaluating the following two independent short-term financing arrangements. What is the annual percentage cost for each financing alternative?

a. A 30-day loan secured against inventory from First Financial Co. with the following terms: (3 points)

- Inventory value equals $27 million
- The financing company will lend up to 50% of the inventory value.
- 0.20% processing fee (every 30 days) based on the total inventory value
- Loan rate is 6% annually.
- Calculate the effective annual interest rate.

b. Delay payments we make to our suppliers: (2 points)

We currently have terms of 2/10 net 30 days and pay on the 10^th day.
We now will pay on the 30^th day
Calculate the effective annual interest rate.

Solutions

Expert Solution

Effective rate on a discounted loan

= Interest Payment /Bank Loan – Processing Fees X 360/Actual loan days =

= 67500/13500000 – 27000 * 360/30

= 67500/13473000 * 12

= 0.00501 * 12

= 0.0601 ( 6.01%)

Effective Interest rate on trade discount

Discount percentage / (1 – discount percentage) x [360 / (full allowed payment days - discount days)

= 0.02 / (1- 0.02)* 360/ (30- 10)

= 0.02/0.98 * 18

= 0.0204 * 18

= 0.3635 (36.35%)

jeff jeffy answered 2 years ago

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