Tuckahoe Hospital wishes to establish a line of credit with a bank. FIRST Bank terms call for a $500,000 maximum loan with an interest rate of 4% and a $2,000 fee. SECOND Bank terms call for a $500,000 maximum loan with an interest rate of 5% but no fee. The compensating balance requirement is 5% of the total line of credit for either bank.What is the effective interest rate for Tuckahoe Hospital from FIRST Bank if 50% of the total amount were used during the year?What is the effective interest rate for Tuckahoe Hospital from FIRST Bank is 25% of the total amount were used during the year?What is the effective interest rate for Tuckahoe Hospital from SECOND Bank if 50% of the total amount were used during the year?What is the effective interest rate for Tuckahoe Hospital from SECOND Bank if 25% of the total amount were used during the year?Which bank would be the better choice for Tuckahoe Hospital? You will enter FIRST or SECOND as your answer.

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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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Tuckahoe Hospital wishes to establish a line of credit with a bank. FIRST Bank terms call for a $500,000 maximum loan with an interest rate of 4% and a $2,000 fee. SECOND Bank terms call for a $500,000 maximum loan with an interest rate of 5% but no fee. The compensating balance requirement is 5% of the total line of credit for either bank.

What is the effective interest rate for Tuckahoe Hospital from FIRST Bank if 50% of the total amount were used during the year?
What is the effective interest rate for Tuckahoe Hospital from FIRST Bank is 25% of the total amount were used during the year?
What is the effective interest rate for Tuckahoe Hospital from SECOND Bank if 50% of the total amount were used during the year?
What is the effective interest rate for Tuckahoe Hospital from SECOND Bank if 25% of the total amount were used during the year?
Which bank would be the better choice for Tuckahoe Hospital? You will enter FIRST or SECOND as your answer.

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