Pedro Gil Company must maintain a compensating balance of P50,000 in its checking account as one of the conditions of its short-term 6% bank loan of P500,000. Pedro Gil’s checking account earns 2% interest. Ordinarily, Pedro Gil would maintain a P20,000 balance in the account for transaction purposes. What is the loan’s approximate effective interest rate? Please show your solution.
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Pedro Gil Company must maintain a compensating balance of P50,000 in its checking account as one of the conditions of its short-term 6% bank loan of P500,000. Pedro Gil’s checking account earns 2% interest. Ordinarily, Pedro Gil would maintain a P20,000 balance in the account for transaction purposes. What is the loan’s approximate effective interest rate?
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- The Premiere Company obtained a short-term bank loan for P1,000,000 at an annual interest rate 12%. As a condition of the loan, Premiere is required to maintain a compensating balance of P300,000 in its checking account. The checking account earns interest at an annual rate of 3%. Premiere would otherwise maintain only P100,000 in its checking account for transactional purposes. Required: Compute for the effective interest rate assuming: a. Loan is not discounted. Loan is without compensating balance. b. Loan is discounted. Loan is without compensating balance. c. Loan is not discounted. Loan is with compensating balance. d. Loan is discounted. Loan is with compensating balance. e. Which of the loan arrangements above is most beneficial to the firm? Justify.A bank offers your firm a revolving credit arrangement for up to $86 million at an interest rate of 2.15 percent per quarter. The bank also requires you to maintain a compensating balance of 2 percent against the unused portion of the credit line, to be deposited in a non-interest-bearing account. Assume you have a short-term investment account at the bank that pays 1.50 percent per quarter, and assume that the bank uses compound interest on its revolving credit loans. a. What is your effective annual interest rate (an opportunity cost) on the revolving credit arrangement if your firm does not use it during the year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Effective annual interest rate % b. What is your effective annual interest rate on the lending arrangement if you borrow $50 million immediately and repay it in one year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2…Charlton Enterprises negotiated a line of credit at the bank that requires it to pay 12.5% interest on its borrowing. The firm is required to maintain a compensating balance equal to 10% of the amount borrowed. The firm borrowed $500,000 during the year. a.Calculate the effective annual rate on the firm’s borrowing if the firm normally maintains no deposit balances at the bank.b.Calculate the effective annual rate on the firm’s borrowing if the firm normally maintains a deposit balance of $45,000 at the bank. c.Calculate the effective annual rate on the firm’s borrowing if the firm normally maintains a deposit balance of $145,000 at the bank. d.What is the change in the effective annual rate when the deposit balances increase?
- The Blake Company has an outstanding bank loan of P400,000 at an interest rate of 12%. The company is required to maintain a 20% compensating balance in its checking account. What is the effective interest cost of the loan? Assume that the company would not normally maintain this average amount? Format: 11%Holland Construction Company has an outstanding 180-day bank loan of $393,000 at an annual interest rate of 9.7%. The company is required to maintain a 14% compensating balance in its checking account. What is the effective interest rate on the loan? Assume the company would not normally maintain this average amount.Cumberland Furniture wishes to establish a prearranged borrowing agreement with its local commercial bank. The bank’s terms for a line of credit are 3.30% over the prime rate, and each year the borrowing must be reduced to zero for a 30-day period. For an equivalentrevolving credit agreement, the rate is 2.80% over prime with a commitment feeof 0.50% on the average unused balance. With both loans, the required compensating balance is equal to 20% of the amount borrowed. The prime rate is currently 8%. Both agreements have $4 million borrowing limits. The firm expects on average to borrow $2 million during the year no matter which loan agreement it decides to use. What is the effective annual rate under the line of credit? b. What is the effective annual rate under the revolving credit agreement? (Hint: Compute the ratio of the dollars that the firm will pay in interest and commitment fees to the dollars that the firm will effectively have used of.) If the firm does expect to borrow…
- NOP Co. has agreed to the following loan proposal by a bank:▪ Stated interest rate of 10% on a one-year discounted note ▪ 15% of the loan as compensating balance with zero-interest current account to be maintained with the bank. ▪ The loan will have net proceeds of P1,500,000. Required:1. How much is the principal amount of the loan?Suppose that you owe $2,000 on a credit card that charges 18% APR and you pay either the minimum 10% or $20, whichever is higher, every month. How long will it take you to eliminate the debt? Assume that the bank uses the previous-balance method to calculate your interest, meaning that the bank does not subtract the amount of your payment from the beginning balance but charges you interest on the previous balance.The Abra Company owes P200,000 on a note payable plus P8,000 in interest to its bank. The note is scoured by inventory with a book value of P160,000 and a fair value of P120,000. What amount will the bank received if unsecured creditors receive 75% of their claims?
- Company A is currently cash-constrained, and must make a decision about whether to delay paying one of its suppliers, or taking out a loan. They owe the supplier $23345, and they can borrow the money from Bank A, which has offered to lend the firm $23345 for 2 month(s) at an APR (compounded) of 15%. The bank will require a (no-interest) compensating balance of 7% of the face value of the loan and will charge a $216 loan origination fee, which means Hand-to-Mouth must borrow even more than the $23345. Compute the EAR of the loan. Give typing answer with explanation and conclusionSuppose 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.Company, a financial institution, allows Integrity Company to borrow P1,300,000 with 8% interest. Honesty would require a compensating balance of 8% of the face value of the loan.What is the effective interest rate of the loan (round off your answer to two decimal places)?