.

11/5/14, 1:07 PM

award:

2.00 points
Compute the cost of not taking the following cash discounts. (Use a 360-day year. Do not round
intermediate calculations. Input your final answers as a percent rounded to 2 decimal places.)

a.
b.
c.
d.

3/19, net 60.
2/19, net 45.
4/19, net 45.
3/16, net 190.

Cost of Lost Discount
%
%
%
%

View Hint #1

Worksheet

2.

Learning Objective: 08-01 Trade
credit from suppliers is normally the
most available form of short-term
financing.

Difficulty: Basic

award:

1.00 point
A pawnshop will lend $1,500 for 45 days at a cost of $30 interest.
What is the effective rate of interest? (Use a 360-day year. Do not round intermediate calculations.
Input your answer as a percent rounded to 2 decimal places.)
Effective rate of interest

%

View Hint #1

Worksheet

3.

Difficulty: Basic

Learning Objective: 08-02 Bank
loans are usually short term in
nature and should be paid off from
funds from the normal operations of
the firm.

award:

1.00 point
Mary Ott is going to borrow $10,000 for 120 days and pay $140 interest.

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Page 1 of 19

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What is the effective rate of interest if the loan is discounted? (Use a 360-day year. Do not round
intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Effective rate on a discounted loan

%

View Hint #1

Worksheet

4.

Learning Objective: 08-02 Bank
loans are usually short term in
nature and should be paid off from
funds from the normal operations of
the firm.

Difficulty: Basic

award:

1.00 point
Dr. Ruth is going to borrow $5,500 to help write a book. The loan is for one year and the money can either
be borrowed at the prime rate or the LIBOR rate. Assume the prime rate is 9 percent and LIBOR 1.0
percent less. Also assume there will be a $70 transaction fee with LIBOR (this amount must be added to the
interest cost with LIBOR).
a. What is the effective interest rate on the LIBOR loan? (Use a 360-day year. Do not round intermediate
calculations. Input your answer as a percent rounded to 2 decimal places.)
Effective interest rate
b.

%

Which loan has the lower effective interest cost?
Prime
LIBOR
View Hint #1

Worksheet

5.

Difficulty: Basic

Learning Objective: 08-02 Bank
loans are usually short term in
nature and should be paid off from
funds from the normal operations of
the firm.

award:

1.00 point
Gulliver Travel Agencies thinks interest rates in Europe are low. The firm borrows euros at 13 percent for
one year. During this time period the dollar falls 12 percent against the euro. What is the effective interest
rate on the loan for one year? (Consider the 12 percent fall in the value of the dollar as well as the interest
payment.) (Compute your answer from a U.S. perspective. Input your answer as a whole percent.)

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Effective interest rate

%

View Hint #1

Worksheet

6.

Difficulty: Basic

Learning Objective: 08-02 Bank
loans are usually short term in
nature and should be paid off from
funds from the normal operations of
the firm.

award:

1.00 point
Talmud Book Company borrows $17,100 for 70 days at 9 percent interest.
What is the dollar cost of the loan? (Use a 360-day year. Do not round intermediate calculations and
round your final answer to 2 decimal places.)
Cost of loan

$

View Hint #1

Worksheet

7.

Difficulty: Basic

Learning Objective: 08-02 Bank
loans are usually short term in
nature and should be paid off from
funds from the normal operations of
the firm.

award:

2.00 points
McGriff Dog Food Company normally takes 30 days to pay for average daily credit purchases of $9,050. Its
average daily sales are $10,190, and it collects accounts in 34 days.
a. What is its net credit position?
Net credit position

$

b-1. If the firm extends its average payment period from 30 days to 42 days (and all else remains the
same), what is the firm’s new net credit position? (Negative amount should be indicated by a
minus sign.)
Net credit position

$

b-2. Has the firm improved its cash flow?
Yes
No
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View Hint #1

Worksheet

8.

Learning Objective: 08-01 Trade
credit from suppliers is normally the
most available form of short-term
financing.

Difficulty: Basic

award:

1.00 point
Carey Company is borrowing $350,000 for one year at 12.0 percent from Second Intrastate Bank. The bank
requires a 18 percent compensating balance. The principal refers to funds the firm can effectively utilize
(Amount borrowed Compensating balance).
a. What is the effective rate of interest? (Use a 360-day year. Input your answer as a percent rounded
to 2 decimal places.)
Effective rate of interest

%

b. What would the effective rate be if Carey were required to make 12 equal monthly payments to retire the
loan? (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)
Effective rate of interest

%

View Hint #1

Worksheet

9.

Difficulty: Intermediate

Learning Objective: 08-02 Bank
loans are usually short term in
nature and should be paid off from
funds from the normal operations of
the firm.

award:

2.00 points
Your company plans to borrow $10 million for 12 months, and your banker gives you a stated rate of 14
percent interest.
Calculate the effective rate of interest for the following types of loans.
a. Simple 14 percent interest with a compensating balance of 18 percent. (Use a 360-day year. Input your
answer as a percent rounded to 2 decimal places.)
Effective rate of interest

%

b. Discounted interest (with no compensating balance). (Input your answer as percent rounded to 2
decimal places.)
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Effective rate of interest

%

c. An installment loan (12 payments). (Input your answer as a percent rounded to 2 decimal places.)
Effective rate of interest

%

d. Discounted interest with a compensating balance of 9 percent. (Use a 360-day year. Input your
answer as a percent rounded to 2 decimal places.)
Effective rate of interest

%

View Hint #1

Worksheet

10.

Learning Objective: 08-02 Bank
loans are usually short term in
nature and should be paid off from
funds from the normal operations of
the firm.

Difficulty: Intermediate

award:

1.00 point
If you borrow $7,300 at $800 interest for one year, what is your effective interest rate for the following
payment plans? (Input your answers as a percent rounded to 2 decimal places.)
Effective Rate of
Interest
a. Annual payment
b. Semiannual payments
c.Quarterly payments
d. Monthly payments

%
%
%
%

View Hint #1

Worksheet

11.

Difficulty: Intermediate

Learning Objective: 08-02 Bank
loans are usually short term in
nature and should be paid off from
funds from the normal operations of
the firm.

award:

1.00 point
Mr. Hugh Warner is a very cautious businessman. His supplier offers trade credit terms of 2/15, net 90. Mr.
Warner never takes the discount offered, but he pays his suppliers in 80 days rather than the 90 days
allowed so he is sure the payments are never late.
What is Mr. Warner’s cost of not taking the cash discount? (Use a 360-day year. Do not round
intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

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Cost of not taking a cash discount

%

View Hint #1

Worksheet

12.

Learning Objective: 08-02 Bank
loans are usually short term in
nature and should be paid off from
funds from the normal operations of
the firm.

Difficulty: Challenge

award:

2.00 points
The Reynolds Corporation buys from its suppliers on terms of 3/17, net 45. Reynolds has not been utilizing
the discounts offered and has been taking 45 days to pay its bills.
Mr. Duke, Vice President of Reynolds Corporation, has suggested that the company begin to take the
discounts offered. Duke proposes that the company borrow from its bank at a stated rate of 16 percent. The
bank requires a 20 percent compensating balance on these loans. Current account balances would not be
available to meet any of this compensating balance requirement.
a. Calculate the cost of not taking a cash discount. (Use a 360-day year. Do not round intermediate
calculations. Input your answer as a percent rounded to 2 decimal places.)
Cost of not taking a cash discount

%

b. What is the effective rate of interest on the bank loan? (Use a 360-day year. Do not round
intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Effective rate of interest

%

c. Do you agree with Duke’s proposal?
Yes
No
View Hint #1

Worksheet

Difficulty: Challenge

13.

Learning Objective: 08-01 Trade
credit from suppliers is normally the
most available form of short-term
financing.
Learning Objective: 08-02 Bank
loans are usually short term in
nature and should be paid off from
funds from the normal operations of
the firm.

award:

2.00 points
Neveready Flashlights Inc. needs $345,000 to take a cash discount of 3/13, net 73. A banker will loan the

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Page 6 of 19

Assignment Print View

11/5/14, 1:07 PM

money for 60 days at an interest cost of $12,300.
a.What is the effective rate on the bank loan? (Use a 360-day year. Do not round intermediate
calculations. Input your answer as a percent rounded to 2 decimal places.)
Effective rate of interest

%

b. How much would it cost (in percentage terms) if the firm did not take the cash discount but paid the bill
in 73 days instead of 13 days? (Use a 360-day year. Do not round intermediate calculations. Input
your answer as a percent rounded to 2 decimal places.)
Cost of not taking a cash discount

%

c. Should the firm borrow the money to take the discount?
No
Yes
d. If the banker requires a 20 percent compensating balance, how much must the firm borrow to end up
with the $345,000?
Amount to be borrowed

$

e-1. What would be the effective interest rate in part d if the interest charge for 60 days were $11,800?
(Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent
rounded to 2 decimal places.)
Effective rate of interest

%

e-2. Should the firm borrow with the 20 percent compensating balance requirement? (The firm has no
funds to count against the compensating balance requirement.)
Yes
No
View Hint #1

Worksheet

Difficulty: Challenge

14.

Learning Objective: 08-01 Trade
credit from suppliers is normally the
most available form of short-term
financing.
Learning Objective: 08-02 Bank
loans are usually short term in
nature and should be paid off from
funds from the normal operations of
the firm.

award:

2.00 points
Summit Record Company is negotiating with two banks for a $157,000 loan. Fidelity Bank requires a

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Page 7 of 19

Assignment Print View

11/5/14, 1:07 PM

compensating balance of 24 percent, discounts the loan, and wants to be paid back in four quarterly
payments. Southwest Bank requires a compensating balance of 12 percent, does not discount the loan, but
wants to be paid back in 12 monthly installments. The stated rate for both banks is 8 percent.
Compensating balances will be subtracted from the $157,000 in determining the available funds in part a.
a-1. Calculate the effective interest rate for Fidelity Bank and Southwest Bank. (Do not round
intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

Fidelity Bank
Southwest Bank

Effective Rate of
Interest
%
%

a-2. Which loan should Summit accept?
Southwest Bank
Fidelity Bank
b. Recompute the effective cost of interest, assuming that Summit ordinarily maintains $37,680 at each
bank in deposits that will serve as compensating balances. (Do not round intermediate
calculations. Input your answers as a percent rounded to 2 decimal places.)

Fidelity Bank
Southwest Bank

Effective Rate of
Interest
%
%

c. Does your choice of banks change if the assumption in part b is correct?
Yes
No
View Hint #1

Worksheet

15.

Difficulty: Challenge

Learning Objective: 08-02 Bank
loans are usually short term in
nature and should be paid off from
funds from the normal operations of
the firm.

award:

2.00 points
Charmin Paper Company sells to the 12 accounts listed next.

Account
A
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Receivable
Balance
Outstanding
$ 63,100

Average Age of
the Account
Over the Last Year
27
Page 8 of 19

Assignment Print View

11/5/14, 1:07 PM

B
C
D
E
F
G
H
I
J
K
L

219,000
77,100
26,300
56,800
243,000
36,200
315,000
44,600
98,300
235,000
69,600

43
14
58
43
34
25
67
33
50
16
35

Capital Financial Corporation will lend 90 percent against account balances that have averaged 30 days
or less; 80 percent for account balances between 31 and 40 days; and 70 percent for account balances
between 41 and 45 days. Customers that take over 45 days to pay their bills are not considered acceptable
accounts for a loan.
The current prime rate is 13.50 percent, and Capital charges 4.50 percent over prime to Charmin as its
annual loan rate.
a. Determine the maximum loan for which Charmin Paper Company could qualify.
Maximum loan amount

$

b. Determine how much one months interest expense would be on the loan balance determined in part a.
(Do not round intermediate calculations. Round your final answer to 2 decimal places.)
Interest expense

$

View Hint #1

Worksheet

16.

Learning Objective: 08-01 Trade
credit from suppliers is normally the
most available form of short-term
financing.

Difficulty: Challenge

award:

2.00 points
The treasurer for Pittsburgh Iron Works wishes to use financial futures to hedge her interest rate exposure.
She will sell five Treasury futures contracts at $195,000 per contract. It is July and the contracts must be
closed out in December of this year. Long-term interest rates are currently 14.30 percent. If they increase to
15.50 percent, assume the value of the contracts will go down by 15 percent. Also if interest rates do
increase by 1.2 percent, assume the firm will have additional interest expense on its business loans and
other commitments of $158,000. This expense, of course, will be separate from the futures contracts.
a. What will be the profit or loss on the futures contract if interest rates go to 15.50 percent by December
when the contract is closed out? (Input the amount as a positive value.)
(Click to select)

on futures contracts

$

b-1. After considering the hedging, what is the net cost to the firm of the increased interest expense of
$158,000?

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11/5/14, 1:07 PM

Net cost

$

b-2. What percent of this $158,000 cost did the treasurer effectively hedge away? (Input your answer as
a percent rounded to 2 decimal places.)
Percentage hedged away

%

c. Indicate whether there would be a profit or loss on the futures contracts if interest rates went down.
Loss
Profit
View Hint #1

Worksheet

17.

Difficulty: Challenge

Learning Objective: 08-05 Hedging
may be used to offset the risk of
interest rates rising.

award:

1.00 point
What is the present value of:
Use Appendix B as an approximate answer, but calculate your final answer using the formula and financial
calculator methods.
a. $8,400 in 12 years at 11 percent? (Do not round intermediate calculations. Round your final answer
to 2 decimal places.)
Present value

$

b. $17,200 in 6 years at 9 percent? (Do not round intermediate calculations. Round your final answer
to 2 decimal places.)
Present value

$

c. $26,800 in 18 years at 10 percent? (Do not round intermediate calculations. Round your final
answer to 2 decimal places.)
Present value

$

View Hint #1

Worksheet

18.

Difficulty: Basic

Learning Objective: 09-03 The
present value is based on the
current value of funds to be
received.

award:

2.00 points
You will receive $5,500 three years from now. The discount rate is 13 percent.

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Page 10 of 19

Assignment Print View

11/5/14, 1:07 PM

a. What is the value of your investment two years from now? Multiply $5,500 .885 (one years discount
rate at 13 percent). (Round your answer to 2 decimal places.)
Value of investment

$

b. What is the value of your investment one year from now? Multiply your rounded answer to part a by .885
(one years discount rate at 13 percent). (Round your answer to 2 decimal places.)
Value of investment

$

c. What is the value of your investment today? Multiply your rounded answer to part b by .885 (one years
discount rate at 13 percent). (Round your answer to 2 decimal places.)
Value of investment

$

d. Confirm that your answer to part c is correct by going to the link provided below (present value of $1) for
n = 3 and i = 13%. Multiply this tabular value by $5,500 and compare your answer to part c. There may
be a slight difference due to rounding. Use Appendix B. (Round your answer to 2 decimal places.)
Present value

$

e. Now compute the present value of $5,500 for 3 years at 13 percent using the formula and financial
calculator methods. (Do not round intermediate calculations. Round your answer to 2 decimal
places.)
Present value

$

View Hint #1

Worksheet

19.

Difficulty: Basic

Learning Objective: 09-04 Not only
can future value and present value
be computed, but other factors such
as yield (rate of return) can be
determined as well.

award:

2.00 points
If you invest $16,000 today, how much will you have:
Use Appendix A as an approximate answer, but calculate your final answer using the formula and financial
calculator methods.
a. In 9 years at 8 percent? (Do not round intermediate calculations. Round your final answer to 2
decimal places.)
Future value

$

b. In 20 years at 11 percent? (Do not round intermediate calculations. Round your final answer to 2
decimal places.)
Future value

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$

Page 11 of 19

Assignment Print View

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c. In 18 years at 14 percent? (Do not round intermediate calculations. Round your final answer to 2
decimal places.)
Future value

$

d. In 10 years at 14 percent (compounded semiannually)? (Do not round intermediate calculations.
Round your final answer to 2 decimal places.)
Future value

$

View Hint #1

Worksheet

20.

Difficulty: Basic

Learning Objective: 09-02 The
future value is based on the number
of periods over which the funds are
to be compounded at a given
interest rate.

award:

1.00 point
Your uncle offers you a choice of $120,000 in 10 years or $54,000 today. Use Appendix B as an approximate
answer, but calculate your final answer using the formula and financial calculator methods.
a-1. If money is discounted at 9 percent, what is the present value of the $120,000? (Do not round
intermediate calculations. Round your final answer to 2 decimal places.)
Present value

$

a-2. Which offer should you choose?
$54,000 today
$120,000 after 10 years
View Hint #1

Worksheet

21.

Difficulty: Basic

Learning Objective: 09-03 The
present value is based on the
current value of funds to be
received.

award:

2.00 points
Your father offers you a choice of $110,000 in 12 years or $47,500 today. Use Appendix B as an approximate
answer, but calculate your final answer using the formula and financial calculator methods.

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a-1. If money is discounted at 10 percent, what is the present value of the $110,000? (Do not round
intermediate calculations. Round your final answer to 2 decimal places.)
Present value

$

a-2. Which offer should you choose?
$110,000 in 12 years
$47,500 today
b-1. Now assume the offer is $110,000 in 9 years or $47,500 today. What is the present value of the
$110,000 at 10 percent for 9 years? (Do not round intermediate calculations. Round your final
answer to 2 decimal places.)
Present value

$

b-2. Now, which offer should you choose?
$47,500 today
$110,000 in 9 years
View Hint #1

Worksheet

22.

Difficulty: Basic

Learning Objective: 09-03 The
present value is based on the
current value of funds to be
received.

award:

2.00 points
How much would you have to invest today to receive: Use Appendix B or Appendix D for an approximate
answer, but calculate your final answer using the formula and financial calculator methods.
a. $12,100 in 5 years at 9 percent? (Do not round intermediate calculations. Round your final answer
to 2 decimal places.)
Present value

$

b. $15,500 in 16 years at 10 percent? (Do not round intermediate calculations. Round your final
answer to 2 decimal places.)
Present value

$

c. $5,500 each year for 12 years at 6 percent? (Do not round intermediate calculations. Round your
final answer to 2 decimal places.)
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11/5/14, 1:07 PM

Present value

$

d. $41,000 each year for 20 years at 8 percent? (Do not round intermediate calculations. Round your
final answer to 2 decimal places.)
Present value

$

View Hint #1

Worksheet

23.

Learning Objective: 09-03 The
present value is based on the
current value of funds to be
received.

Difficulty: Basic

award:

1.00 point
At a growth (interest) rate of 13 percent annually, how long will it take for a sum to double? To triple? Use
Appendix A for an approximate answer, but calculate your final answer using the formula and financial
calculator methods. (Do not round intermediate calculations. Round your final answers to 2 decimal
places.)

Time needed to double
Time needed to triple

years
years

View Hint #1

Worksheet

24.

Difficulty: Basic

Learning Objective: 09-02 The
future value is based on the number
of periods over which the funds are
to be compounded at a given
interest rate.

award:

2.00 points
Juan Garza invested $104,000 10 years ago at 8 percent, compounded quarterly. How much has he
accumulated? Use Appendix A for an approximate answer but calculate your final answer using the formula
and financial calculator methods. (Do not round intermediate calculations. Round your final answer to
2 decimal places.)
Future value

$

View Hint #1

Learning Objective: 09-05
Compounding or discounting may
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Assignment Print View

11/5/14, 1:07 PM

Worksheet

25.

Difficulty: Intermediate

take place on a less than annual
basis such as semiannually or
monthly.

award:

1.00 point
Determine the amount of money in a savings account at the end of 3 years, given an initial deposit of
$6,500 and an annual interest rate of 12 percent when interest is compounded: Use Appendix A for an
approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do
not round intermediate calculations. Round your final answers to 2 decimal places.)
a. Annually
b. Semiannually
c. Quarterly

Future value
$
$
$

View Hint #1

Worksheet

26.

Difficulty: Intermediate

Learning Objective: 09-05
Compounding or discounting may
take place on a less than annual
basis such as semiannually or
monthly.

award:

1.00 point
Annuity payments are assumed to come at the end of each payment period (termed an ordinary annuity).
However, an exception occurs when the annuity payments come at the beginning of each period (termed an
annuity due).
What is the future value of a 7-year annuity of $3,700 per period where payments come at the beginning of
each period? The interest rate is 10 percent. Use Appendix C for an approximate answer, but calculate your
final answer using the formula and financial calculator methods. To find the future value of an annuity due
when using the Appendix tables, add 1 to n and subtract 1 from the tabular value. For example, to find the
future value of a $100 payment at the beginning of each period for five periods at 10 percent, go to
Appendix C for n = 6 and i = 10 percent. Look up the value of 7.716 and subtract 1 from it for an answer of
6.716 or $671.60 ($100 6.716). (Do not round intermediate calculations. Round your final answers
to 2 decimal places.)
Future value

$

View Hint #1

Worksheet

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Difficulty: Intermediate

Learning Objective: 09-04 Not only
can future value and present value
be computed, but other factors such
as yield (rate of return) can be
determined as well.

Page 15 of 19

Assignment Print View

27.

11/5/14, 1:07 PM

award:

2.00 points
Your grandfather has offered you a choice of one of the three following alternatives: $12,000 now; $6,000 a
year for six years; or $76,000 at the end of six years. Use Appendix B and Appendix D for an approximate
answer, but calculate your final answer using the formula and financial calculator methods.
a-1. Assuming you could earn 10 percent annually, compute the present value of each alternative: (Do not
round intermediate calculations. Round your final answers to 2 decimal places.)
Present Value
$12,000

$

$6,000
$76,000

$
$

a-2. Which alternative should you choose?
$76,000 received at end of six years
$6,000 received each year for six years
$12,000 received now
b-1. If you could earn 11 percent annually, compute the present value of each alternative: (Do not round
intermediate calculations. Round your final answers to 2 decimal places.)

$12,000
$6,000
$76,000

Present Value
$
$
$

b-2. Which alternative should you choose?
$76,000 received at end of six years
$6,000 received each year for six years
$12,000 received now
View Hint #1

Worksheet

28.

Difficulty: Challenge

Learning Objective: 09-03 The
present value is based on the
current value of funds to be
received.

award:

2.00 points
You need $25,356 at the end of 9 years, and your only investment outlet is an 9 percent long-term
certificate of deposit (compounded annually). With the certificate of deposit, you make an initial investment
at the beginning of the first year. Use Appendix B and Appendix C for an approximate answer, but calculate
your final answer using the formula and financial calculator methods.

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Page 16 of 19

Assignment Print View

11/5/14, 1:07 PM

a. What single payment could be made at the beginning of the first year to achieve this objective? (Do not
round intermediate calculations. Round your final answer to 2 decimal places.)
Single payment made

$

b. What amount could you pay at the end of each year annually for 9 years to achieve this same objective?
(Do not round intermediate calculations. Round your final answer to 2 decimal places.)
Amount to be paid

$

View Hint #1

Worksheet

29.

Difficulty: Challenge

Learning Objective: 09-04 Not only
can future value and present value
be computed, but other factors such
as yield (rate of return) can be
determined as well.

award:

1.00 point
Franklin Templeton has just invested $10,760 for his son (age one). This money will be used for his sons
education 17 years from now. He calculates that he will need $54,343 by the time the boy goes to school.
What rate of return will Mr. Templeton need in order to achieve this goal? Use Appendix B for an approximate
answer, but calculate your final answer using the formula and financial calculator methods. (Do not round
intermediate calculations. Round your final answer to 2 decimal places.)
Rate of return

%

View Hint #1

Worksheet

30.

Difficulty: Challenge

Learning Objective: 09-04 Not only
can future value and present value
be computed, but other factors such
as yield (rate of return) can be
determined as well.

award:

1.00 point
You wish to retire in 12 years, at which time you want to have accumulated enough money to receive an
annual annuity of $27,000 for 17 years after retirement. During the period before retirement you can earn 8
percent annually, while after retirement you can earn 10 percent on your money.
What annual contributions to the retirement fund will allow you to receive the $27,000 annuity? Use Appendix
C and Appendix D for an approximate answer, but calculate your final answer using the formula and financial

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calculator methods. (Do not round intermediate calculations