Principles of Finance

Tinker, Inc, finances its seasonal working capital need with short-term

bank loans. Management plans to borrow $65,000 for a year. The bank

has offered the company a 3.5 percent discounted loan with 1.5 percent

origination fee. What are the interest payment and the origination fee

required by the loan? What is the rate of interest charged by the bank?

Interest Paid = $65,000 x 3.5% = $2275

Origination Fee = $65,000 x 1.5% = $975

$65,000 - $2,275 - $975 = $61,750

Rate of Interest = $3,250/61750 0.052631579 5.26%

Ch 26-5 n

An individual wishes to borrow $10,000 for a year and is offered the following

alternatives:

a. A 10 percent loan discounted in advance.

P0(1 + i)n = Pn

9000(1 + i)1 = 10,000

1 + i = 1.111111

i= 1.111 - 1 = .111 = 11.1%

b. A 11 percent straight loan (i.e., interest paid at maturity)

icb= Int Paid x 12 =

Proceeds # months

outstanding

1100 x 12 = 1,100 0.11

10,000 12 10,000 11%

Which loan is more expensive?

The discounted loan is slightly more expensive, as the interest rate is 11.1%,

while the straight loan has an interest rate of 11%.

Ch 26-6

Which of the following terms of trade credit is the most expensive?

a. A 3 percent cash discount if paid on the 15th day with the bill due on

the 45th day 3/15, net 45. .

irc = ( Pecentage discount ) x ( 360 )

( 100%-percent disc ) (Pay period -

disc period )

(0.03 )x (360 ) = (0.03) x( 360)

(1 - .03) (45-15) (0.97) (30)

.0309 X 12 = 0.3708 37.1%

b A 2 percent cash discount if paid on the 10th day with the bill due on

the 30th day, 2/10, net 30.

(.02) x (360 ) = (0.02) X ( 360)

(1-.03) (30-10) (0.98) (20)

.020408 X 18 = 0.367344 36.7%

The cash discount of 3/15, net 45 costs a small amount more.

The amounts above are shown at the simple rate. The

compounded rate will be even higher.

a. i - (Pn/P0)365/n -1

I= (100/97)365/30 -1 =

I = (1.0309)12.166 -1 = .4481 = 44.81%

b. I - (Pn/P0)365/n -1

I= (100/98)365/20 -1 =

I = (1.0204)18.25 -1 = .4456 = 44.6%

Again, the cash discount of 3/15, net