Introduction to Finance

b. 
How much money will Michael’s draw down from the line of 
credit during a low-use month?
c. 
How much will Michael’s need to borrow in a month before it 
maximizes its use of the line of credit?
d. 
What is the average cost to Michael’s of using the line of credit 
for a year?
15. 
Montcalm Enterprises is seeking bids on short-term loans with 
area banks. It expects its average outstanding borrowings to equal 
$320,000. Which of the following terms off ers Montcalm the lowest 
eff ective rate?
a. 
Town Bank: revolving credit agreement for $500,000 with a 
15 percent APR, 0.5 percent commitment fee on the unused portion.
b. 
Village Bank: revolving credit agreement for $400,000 with a 
12 percent APR, 1.0 percent commitment fee on the unused portion 
and a 10 percent compensating balance requirement based on the 
size of the bank’s commitment.
16. 
Beckheart is seeking fi nancing for its inventory. Safe-Proof 
Warehouses off ers space in their facility for Beckheart’s inventory. 
They off er loans with a 15 percent APR equal to 60 percent of the 
inventory. Monthly fees for the usage of the warehouse are $500 plus 
0.5 percent of the inventory’s value. If Beckheart has saleable invent-
ory of $2 million, answer the following:
a. 
How much money can the fi rm borrow?
b. 
What is the interest cost of the loan in dollars over a year?
c. 
What is the total amount of fees to be paid in a year?
d. 
What is the eff ective annual rate of using Safe-Proof to fi nance 
Beckheart’s inventory?
17. 
CDRW is evaluating an inventory fi nancing arrangement with 
DVD Banks. CDRW estimates an average monthly inventory balance 
of $800,000. DVD Bank is off ering a 12 percent APR loan on 
75 percent of the value of the inventory. DVD’s inventory storage 
and evaluation fees will be 1 percent a month on the total value of 
the inventory. What is the annual eff ective rate of the inventory loan?
18. 
Which of the following off er the lowest eff ective rate for Wolf 
Howl jackets? Assume Wolf Howl will need to borrow $800,000 for 
180 days.