Introduction to Finance

4. 
Compute the eff ective cost of not taking the cash discount under 
the following trade credit terms:
a. 
2/10 net 40
b. 
2/10 net 50
c. 
3/10 net 50
d. 
2/20 net 40
5. 
What conclusions can you make about credit terms from reviewing 
your answers to Problem 4?
6. 
Your fi rm needs to raise funds for inventory expansion.
a. 
What is the eff ective annual rate on a loan of $150,000 if it is 
discounted at a 12 percent stated annual rate and it matures in fi ve 
months?
b. 
How much must you borrow to obtain usable funds of $150,000?
c. 
What is the eff ective annual rate if you borrow the funds com-
puted in (b)?
7. 
Bank A off ers loans with a 10 percent stated annual rate and a 
10 percent compensating balance. You wish to obtain $250,000 in a 
six-month loan.
a. 
How much must you borrow to obtain $250,000 in usable funds? 
Assume you do not have any funds on deposit at the bank. What is 
the eff ective annual rate on a six-month loan?
b. 
How much must you borrow to obtain $250,000 in usable funds 
if you currently have $10,000 on deposit at the bank? What is the 
eff ective annual rate on a six-month loan?
c. 
How much must you borrow to obtain $250,000 in usable funds 
if you have $30,000 deposited at the bank?
What is the eff ective annual rate on a six-month loan?
8. 
Compute the eff ective annual rates of the following:
a. 
$1 million maturing in 90 days with a stated annual rate of 
6 percent. Fees are 0.02 percent of the principal.
b. 
$15 million maturing in 60 days with a stated annual rate of 
7.6 percent. Fees are 0.05 percent of the principal.

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