(Related to Checkpoint 18.2) (Calculating the cost of a short-term bank loan) On July 1, 2016, the Southwest Forging Corporation arranged for a line of credit with the First National Bank (FNB) of Dallas. The terms of the agreement call for a $100,000 maximum loan with interest set at 2 percent over prime. In addition, the firm has to maintain a 22 percent compensating balance in its demand deposit account throughout the year. The prime rate is currently 6 percent (assume a 360-day year). a. If Southwest normally maintains a $22,000 to $32,000 balance in its checking account with FNB of Dallas, what is the annualized cost of credit through the line-of-credit agreement when the maximum loan amount is used for a full year? b. Recompute the annualized cost of credit to Southwest if the firm borrows the compensating balance and also borrows the maximum possible under the loan agreement. Again, assume the full amount of the loan outstanding for a whole year. a. If Southwest normally maintains a $22,000 to $32,000 balance in its checking account with FNB of Dallas, the effective cost of credit under the line-of-credit agreement when the maximum loan amount is used for a full year is %. (Type a whole percentage.)

(Related to Checkpoint 18.2) (Calculating the cost of a short-term bank loan) On July 1, 2016, the Southwest Forging Corporation arranged for a line of credit with the First National Bank (FNB) of Dallas. The terms of the agreement call for a $100,000 maximum loan with interest set at 2 percent over prime. In addition, the firm has to maintain a 22 percent compensating balance in its demand deposit account throughout the year. The prime rate is currently 6 percent (assume a 360-day year). a. If Southwest normally maintains a $22,000 to $32,000 balance in its checking account with FNB of Dallas, what is the annualized cost of credit through the line-of-credit agreement when the maximum loan amount is used for a full year? b. Recompute the annualized cost of credit to Southwest if the firm borrows the compensating balance and also borrows the maximum possible under the loan agreement. Again, assume the full amount of the loan outstanding for a whole year. a. If Southwest normally maintains a $22,000 to $32,000 balance in its checking account with FNB of Dallas, the effective cost of credit under the line-of-credit agreement when the maximum loan amount is used for a full year is %. (Type a whole percentage.)

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 21P

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