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International Financing and Payments Techniques

Assignment 5 Short term financing 1. Yonge Corporation must arrange financing for its working capital requirements (USD 100 000) for the coming year. Yonge can a) orrow from its ank on a simple interest asis (interest paya le at the en! of the loan) for 1 year at 1"# nominal rate$ ) orrow on an installment loan asis at a %# a!!&on rate with 1" en!&of&month payments$ c) orrow on a ' month( ut renewa le( loan at an 11.)# nominal rate$ or !) o tain the nee!e! fun!s y no longer taking !iscounts an! thus increasing its accounts paya le. Yonge uys on terms of 1*1)( net %0. +hat is the effecti,e annual cost of the least e-pensi,e type of cre!it( assuming '%0 !ays per year. ". /he /hompson Corporation pro0ects an increase in sales from 11.) million to 1" million( ut it nee!s an a!!itional 1'00(000 of current assets to support this e-pansion. /he money can e o taine! from the ank at an interest rate of 1'#( !iscount interest$ no compensating alance is require!. 2lternati,ely( /hompson can finance the e-pansion y no longer taking !iscounts( thus increasing accounts paya le. /hompson purchases un!er terms "*10 net '0( ut it can !elay the payment for an a!!itional ') !ays 3 paying in %) !ays an! thus ecoming ') !ays past !ue 3 without a penalty ecause of its suppliers4 current e-cess capacity pro lems. a) 5ase! strictly on effecti,e( or equi,alent( annual interest rate comparisons( how shoul! /hompson finance its e-pansion. ) +hat a!!itional qualitati,e factors shoul! /hompson consi!er efore reaching a !ecision. '. 6its 6alore 7nc. orrowe! 11.) million from 8ational City 5ank. /he loan was ma!e for ' months( at a simple annual interest rate of 9#. 2 "0# compensating alance requirement raise! the effecti,e interest rate. a) 7f nominal annual rate on the loan was 11.")#( !ue to the compensating alance( what is the true effecti,e rate. ) +hat woul! e the effecti,e cost of the loan if the loan require! !iscount interest. c) +hat woul! e the nominal annual interest rate on the loan if the ank !i! not require a compensating alance( ut require! repayment in ' equal monthly installments (a ' months a!!& on interest installment loan). :. ;ust 2!! +ater (;2+S) 7nc.( a swimming accessories retailer( is a small company with seasonal sales. Suppose ;2+S !eci!e! to raise a!!itional USD 100 000 as a 1 year loan from its ank( for which it was quote! an annual nominal rate of <#. +hat is the effecti,e annual cost rate assuming (1) simple interest( (") !iscount interest( (') !iscount interest with a 10# compensating alance an! (:) a!!&on interest on a 1" month instalment loan. =or the first three of these assumptions( woul! it matter if the loan were for 90 !ays( ut renewa le up to 1 year.