State Federal Bank (SFB) offers two borrowing options to businesses: (1) a simple interest loan with a 7 percent interest rate and no compensating balance and (2) a discount interest loan with a quoted rate equal to 5 percent that requires a 20 percent compensating balance. If a firm needs a nine-month loan, which option should it choose based on rEAR? Assume the firm normally maintains a negligible checking account balance at the bank. Assume there are 360 days in a year. Do not round intermediate calculations. Round your answers to two decimal places. Option 1, rEAR: % Option 2, rEAR: % Based on rEAR, should be chosen.

State Federal Bank (SFB) offers two borrowing options to businesses: (1) a simple interest loan with a 7 percent interest rate and no compensating balance and (2) a discount interest loan with a quoted rate equal to 5 percent that requires a 20 percent compensating balance. If a firm needs a nine-month loan, which option should it choose based on rEAR? Assume the firm normally maintains a negligible checking account balance at the bank. Assume there are 360 days in a year. Do not round intermediate calculations. Round your answers to two decimal places. Option 1, rEAR: % Option 2, rEAR: % Based on rEAR, should be chosen.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 19P

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