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22. Columbus Shipping Company is negotiating with two banks for a $100,000 loan

22. Columbus Shipping Company is negotiating with two banks for a $100,000 loan
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FINANCE

FIN 200
Axia College of University of Phoenix (UoP)

Foundations of Financial Management
Block Hirt Danielsen

Introduction to Finance: Harvesting the Money Tree
Fin 200 Week Solution
Chapter 8
22. Columbus Shipping Company is negotiating with two banks for a $100,000 loan. Bankcorp of Ohio requires a 20 percent compensating balance, discounts the loan, and wants to be paid back in four quarterly payments. Cleveland Bank requires a 10 percent compensating balance, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 10 percent. Compensating balances and any discounts will be subtracted from the $100,000 in determining the available funds in part a.

a. Which loan should Columbus accept?
b. Recompute the effective cost of interest, assuming Columbus ordinarily maintains $20,000 at each bank in deposits that will serve as compensating balances.
c. How much did the compensating balances inflate the percentage interest costs? Does your choice of banks change if the assumption in part b is correct?

 

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