Loose Leaf for Foundations of Financial Management Format: Loose-leaf
17th Edition
ISBN: 9781260464924
Author: BLOCK
Publisher: Mcgraw Hill Publishers
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Textbook Question
Chapter 8, Problem 2P
Regis Clothiers can borrow from its bank at 17 percent to take a cash discount. The terms of the cash discount are 3/19, net 45. Should the firm borrow the funds?
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3. Suppose you dopiest SR 5000 in currency into your checking account at a branch of
Al-Rajhi Bank, which we will assume that the required reserve ration is %10.
a. Use a T-account to show the initial effect of this transaction on Al-Rajhi's balance
sheet.
b. Suppose that Al-Rajhi Bank makes the maximum loan it can from the fund you
deposited. Use a T-account to show the the initial effect of this transaction on Al-
Rajhi's balance sheet. Also include in this T-account the transaction from part (a).
c. Now suppose that whoever took out the loan in part (b) writes a check for this amount
and that person receiving the check deposit in Alinma Bank. Use a T-account to show
the the initial effect of this transaction on Alinma's balance sheet.
A firm is offered credit terms of 2/10 net 45 by most of its suppliers. The firm also has a credit line available at a local bank at an interest rate of 12 percent.
What is the cost of giving up the cash discount?Â
Should the company take the cash discount or finance the purchase with the line of credit?
Suppose that a bank does the following:
a. Sets a loan rate on a prospective loan with BR = 4.23% and Ï• = 3.16%.
b. Charges a 0.33 percent loan origination fee to the borrower.
c. Imposes a 9 percent compensating balance requirement to be held as noninterest-bearing demand deposits.
d. Holds reserve requirements of 8 percent imposed by the Federal Reserve on the bank’s demand deposits.
Calculate the bank’s ROA on this loan.
Chapter 8 Solutions
Loose Leaf for Foundations of Financial Management Format: Loose-leaf
Ch. 8 - Under what circumstances would it be advisable to...Ch. 8 - Discuss the relative use of credit between large...Ch. 8 - Prob. 3DQCh. 8 - Prob. 4DQCh. 8 - Prob. 5DQCh. 8 - Prob. 6DQCh. 8 - Prob. 7DQCh. 8 - Prob. 8DQCh. 8 - Prob. 9DQCh. 8 - Prob. 10DQ
Ch. 8 - Prob. 11DQCh. 8 - Prob. 12DQCh. 8 - Compute the cost of not taking the following cash...Ch. 8 - Regis Clothiers can borrow from its bank at 17...Ch. 8 - Simmons Corp. can borrow from its bank at 17...Ch. 8 - Your bank will lend you $4,000 for 45 days at a...Ch. 8 - Prob. 5PCh. 8 - Prob. 6PCh. 8 - Mary Ott is going to borrow $10,400 for 120 days...Ch. 8 - Prob. 8PCh. 8 - Prob. 9PCh. 8 - Prob. 10PCh. 8 - McGriff Dog Food Company normally takes 27 days to...Ch. 8 - Maxim Air Filters Inc. plans to borrow $300,000...Ch. 8 - Digital Access Inc. needs $400,000 in funds for a...Ch. 8 - Carey Company is borrowing $200,000 for one year...Ch. 8 - Randall Corporation plans to borrow $233,000 for...Ch. 8 - Prob. 16PCh. 8 - Your company plans to borrow $13 million for 12...Ch. 8 - If you borrow $5,300 at $400 interest for one...Ch. 8 - Zerox Copying Company plans to borrow $172,000 ....Ch. 8 - Prob. 20PCh. 8 - Mr. Hugh Warner is a very cautious businessman....Ch. 8 - The Reynolds Corporation buys from its suppliers...Ch. 8 - Prob. 23PCh. 8 - Neveready Flashlights Inc. needs $340,000 to take...Ch. 8 - Harper Engine Company needs $631,000 to take a...Ch. 8 - Summit Record Company is negotiating with two...Ch. 8 - Charming Paper Company sells to the 12 accounts...Ch. 8 - The treasurer for Pittsburgh Iron Works wishes to...Ch. 8 - Prob. 2WECh. 8 - Prob. 3WE
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- merchant receives an invoice for $8000 with terms 2/10, n/50.a) What is the maximum interest rate that the merchant could borrow money at to take advantage of the discount?b) If the bank offers a loan for 15% interest, should he accept it, and if so, what will be his savings?arrow_forwardSimmons Corporation can borrow from its bank at 21 percent to take a cash discount. The terms of the cash discount are 2.5/18, net 55. a. Compute the cost of not taking the cash discount. Note: Use a 360-day year. Do not round intermediate calculations. Input your final answer as a percent rounded to 2 decimal places. Cost of not taking a cash discount b. Should the firm borrow the funds? O No O Yes %arrow_forwardConsider a $5,000, 6%, 180-day interest-bearing note and a non-interest- bearing note for the same amount and time period with a bank discount of 6%. From the borrower’s point of view, which is the better loan and why?arrow_forward
- Little Kimi Clothiers can borrow from its bank at 18 percent to take a cash discount. The terms of the cash discount are 2/18 net 55. a. Compute the cost of not taking the cash discount. (Use 365 days in a year. Do not round the intermediate calculations. Round the final answer to 2 decimal places.) Cost of not taking a cash discount b. Should the firm borrow the funds? % Yes â—‹ Noarrow_forwardA4) Finance A company has an average collection period of 34 days and factors all of its receivables immediately at a 3.1% discount. Assume all accounts are collected in full. What is the firm's effective cost of borrowing?arrow_forwardCompany X has trade credit policy 1/10 N45. If you can borrow from a bank at 9,5% annual rate, would it be beneficial to borrow money and pay off invoices earlier?arrow_forward
- Clark’s Landscaping bills customers subject to terms 2/25, n/60. Required: Compute the annual interest rate implicit in the sales discount. If his bank charges 17 percent interest, should the customer borrow from the bank so that he can take advantage of the discount?arrow_forwardSuppose that a bank does the following:  a. Sets a loan rate on a prospective loan at 8 percent (where BR=5% and φ=3%.  b. Charges a 110 percent (or 0.10 percent) loan origination fee to the borrower.  c. Imposes a 5 percent compensating balance requirement to be held as non-interest-bearing demand deposits.  d. Holds reserve requirements of 10 percent imposed by the Federal Reserve on the bank’s demand deposits.  Calculate the bank’s ROA on this loan.arrow_forwardA bank makes a loan of $1,000,000 at a rate of 6% p.a. It also requires a compensating balance of 5%. What is the effective cost to the borrower?arrow_forward
- Set Corporation is deciding which of two banks to borrow from on a 1-year basis. Bank A charges an 18 percent interest rate payable at maturity. Bank B charges a 17 percent interest rate on a discount basis. Which loan is cheaper and its effective interest rate?  choose the letter of the correct answera. Bank A with 18%b. Bank B with 18%c. Bank A with 20.5%d. Bank B with 20.5%e. Both banks with 20.5%arrow_forwardA bank pays 5% with daily compounding on its savings accounts. Should it advertisethe nominal or effective rate if it is seeking to attract new deposits?arrow_forwardA bank wishes to earn a 17% simple interest in discounting notes. If the term of the discount is 3 years and 9 months, what simple discount rate should be used?arrow_forward
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