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Chapter 3: 20BP (page 251)

Lewis and Clark Camping Supplies Inc. is borrowing \(51,000 from Western State Bank. The total interest is \)15,700. The loan will be paid by making equal monthly payments for the next three years. What is the effective rate of interest on this instalment loan?

Short Answer

Expert verified

The effective interest rate is 19.96%.

Step by step solution

01

Information provided in the question

Loan amount = $51,000

Loan term = 3 year

Interest rate = $15,700

02

Calculation of effective interest rate when equal monthly instalments have to be made

The effective interest rate is 19.96%.

Effectiverateoninstalmentloan=2脳Annualnumberofpayments脳InterestTotalnumberofpayments+1脳Principal=2脳12脳$15,70036+1脳$51,000=$376,800$1,887,000=19.96%

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Most popular questions from this chapter

A firm that uses short-term financing methods for a portion of permanent current assets is assuming more risk but expects higher returns than a firm with a normal financing plan. Explain.

In Problem 12, assume the term structure of interest rates becomes inverted, with short-term rates going to 11 percent and long-term rates 5 percentage points lower than short-term rates. If all other factors in the problem remain unchanged, what will earnings after taxes be?

Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by three days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida.

b. If Neon Light Company can earn 6 percent per annum on freed-up funds, how much will the income be?

Guardian Inc. is trying to develop an asset financing plan. The firm has \(400,000 in temporary current assets and \)300,000 in permanent current assets. Guardian also has $500,000 in fixed assets. Assume a tax rate of 40 percent.

c. What would happen if the short- and long-term rates were reversed?

Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. Do an analysis similar to that in Table 6-6.

1-year T bill at the beginning of year 1

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1-year T bill at the beginning of year 2

7%

1-year T bill at the beginning of year 3

9%

1-year T bill at the beginning of year 4

11%
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