150,000+ ESSAYS

Find more results for this search now!
CLICK the BUTTON to the RIGHT!

Need a Brand New Custom Essay Now?  click here

FIN200 Week 7 Assignment Loan Scenarios

Uploaded by ddscoolz on Feb 22, 2013

FIN200 Week 7 Assignment Loan Scenarios


Midland Chemical Co. is negotiating a loan from Manhattan Bank and Trust. The small chemical company needs to borrow $500,000.

The bank offers a rate of 8 ¼ percent with a 20 percent compensating balance requirement, or as an alternative, 9 ¾ percent with additional fees of $5,500 to cover services the bank is providing. In either case the rate on the loan is floating (changes as the prime interest rate changes). The loan would be for one year.

a. Which loan carries the lower effective rate? Consider fees to be the equivalent of other interest.
b. If the loan with a 20 percent compensating balance requirement were to be paid off in 12 monthly payments, what would the effective rate be? (Principal equals amount borrowed minus the compensating balance.)
c. Assume the proceeds from the loan with the compensating balance requirement will be used to take cash discounts. Disregard part b about installment payments and use the loan cost from part a.

If the terms of the cash discount are 1.5/10, net 50, should the firm borrow the funds to take the discount?

d. Assume the firm actually takes 80 days to pay its bills and would continued to do so in the future if it did not take the cash discount. Should the company take the cash discount?
e. Because the interest rate on the loans is floating, it can go up as interest rates go up. Assume that the prime rate goes up by 2 percent and the quoted rate on the loan goes up the same amount. What would then be the effective rate on the loan with compensating balances? Convert the interest to dollars as the first step in your calculation.
f. In order to hedge against the possible rate increase described in part e, the Midland Chemical Co. decides to hedge its position in the futures market. Assume it sells $500,000 worth of 12-month futures contracts on Treasury bonds. One year later, interest rates go up 2 percent across the board and the Treasury bond futures have gone down to $488,000. Has the firm effectively hedged the 2 percent increase in interest rates on the bank loan as described in part e? Determine the answer in dollar amounts.

SOLUTION
Midland Chemical Co.

a. Compensating Balance Loan

$500,000
8.25%
$ 41,250 Interest
$500,000 Loan
100,000 20% compensating balance requirement
$400,000 Available funds



Fee-added Loan

$500,000
9.75%
$ 48,750 Interest

Interest plus fees

$48,750 Interest
5,500 Fees
$54,250



The loan with the...

Sign In Now to Read Entire Essay

Not a Member?   Create Your FREE Account »

Comments / Reviews

read full essay >>

Already a Member?   Login Now >

This essay and THOUSANDS of
other essays are FREE at eCheat.

Uploaded by:   ddscoolz

Date:   02/22/2013

Category:   Business

Length:   2 pages (547 words)

Views:   867

Report this Essay Save Essay
Professionally written essays on this topic:

FIN200 Week 7 Assignment Loan Scenarios

  • Assignment in Expository Writing

    challenging arguments facing many people today is explaining to their family that they are gay or lesbian. This is, for the major...

  • Are Payday Loans Legalized Loan-Sharking?

    (Loan Shark, n.d.). There are two distinctions here that clearly separate payday loan businesses from loan sharks. The fir...

  • Income Inequality News Analysis

    In seven pages income equality is considered in an examination of post September 2000 Business Week and Fortune business journals....

  • An Overview of a Letter to Oprah

    currently caring for my 3 year old son, attempting to maintain autonomy at a time when my parents cannot afford to provide me with...

  • Exercise: Baseline Study

    long-term - when taking on an exercise program maintain much more commitment than their counterparts who have no specific directio...

  • Caravaggio/The Entombment

    to be moving in numbed silence. As this indicates, this is a highly naturalistic rendition of a gospel event, as seen through th...

  • Nursing-Sensitive Outcome Indicators

    nursing quality of care" (Hart, et al, 2006, p. 256). These indicators specifically indicate that complications, such as pressure ...

  • Aspects of Metabolism

    This research paper discusses several aspects of metabolism that relate to an assignment scenario. The subjects covered include: a...

  • Corporate Culture in Small Business

    they get paid. The owner needs to scrutinize the books to see if there is any way to offer some sort of benefit to potential sales...

  • Jesus/Human Relationships Above the Law

    contemporary mindset, the word "law" refers to civil law, which is enforced by the police and government officials. As Jesus indic...

View more professionally written essays on this topic »