1. Calculate the effective interest cost on a $1,000 line of credit with a 6% st
ID: 2826839 • Letter: 1
Question
1. Calculate the effective interest cost on a $1,000 line of credit with a 6% stated interest rate and a 8% compensating balance.
a) 6.00%
b) 6.25%
c) 6.52%
d) 8.00%
2. A firm sells its receivables of $1,000 to a bank for $920. The average collection period is six months. What is the effective annual rate?
a) 5.52%
b) 9.08%
c) 18.16%
d) 23.68%
3. Given that sales are forecasted to increases by 10%, which of the following is least likely to occur?
a) Long-term bonds should also increase by 10%
b) Cost of goods sold should also increase by 10%
c) Current assets should also increase by 10%
d) Current liabilities should also increase by 10%
Explanation / Answer
1.
Amount of credit = $1,000
Compensating balance = $1,000 * 8% = $80
Net credit amount received = $1,000 - $80 = $920
Annual interest amount = $1,000 * 6% = $60
Effective interest cost = Annual interest amount/Net credit amount received
Effective interest cost = $60/$920 = 0.0652 = 6.52%
Hence, correct answer is C) 6.52%
2.
Cost of selling the receivables for six months = $1,000 - $920 = $80
Half yearly rate = $80/$920 = 0.0870 = 8.70%
Effective annual rate = 1.0872 – 1 = 0.1816 = 18.16%
Hence, correct answer is c) 18.16%
3.
Correct answer is a) Long-term bonds should also increase by 10%
The increase in sales shall directly increase the current assets and current liabilities in the same proportion. Long term liabilities shall not be effected by increase in sales.
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