How JustAnswer Works:

  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.

Ask Milan Vaishnav Your Own Question

Milan Vaishnav
Milan Vaishnav, Financial Advisor
Category: Finance
Satisfied Customers: 972
Experience:  Technical Analyst in Financial Markets -- Experience of more than 10 years in consulting
Type Your Finance Question Here...
Milan Vaishnav is online now
A new question is answered every 9 seconds

c. Assume the proceeds from the loan with the compensating

Resolved Question:

c. Assume the proceeds from the loan with the compensating balance requirement will be used to take cash discounts. Disregard part b about installment payments and use the loan cost from part a.

If the terms of the cash discount are 1.5/10, net 50, should the firm borrow the funds to take the discount?

d. Assume the firm actually takes 80 days to pay its bills and would continue to do so in the future if it did not take the cash discount. Should it take the cash discount?

e. Because the interest rate on the loans is floating, it can go up as interest rates go up. Assume that the prime rate goes up by 2 percent and the quoted rate on the loan goes up the same amount. What would then be the effective rate on the loan
with compensating balances? Convert the interest to dollars as the first step in your calculation.

f. In order to hedge against the possible rate increase described in part e, Midland decides to hedge its position in the futures market. Assume it sells $500,000 worth of 12-month futures contracts on Treasury bonds. One year later, interest
rates go up 2 percent across the board and the Treasury bond futures have gone down to $488,000. Has the firm effectively hedged the 2 percent increase in interest rates on the bank loan as described in part e? Determine the answer in
dollar amounts.
Submitted: 4 years ago.
Category: Finance
Expert:  Milan Vaishnav replied 4 years ago.

Dear Friend,

 

C. Effective Rate of Cash Discount would be as under:
= [Discount/(100-Discount)]*[360/(Final period-discount period)]
= [1.5/(100-1.5)]*[{360/(50-10)] = 1.52*9 = 13.68%
The cost of not taking the cash discount is greater than the cost of the loan i.e.13.68% vs. 10.31%.

 

It is advised that the firm should take the cash discount.

 

D. New effective rate would be as under:

= [1.5/(100-1.5)]*[360/(80-10)] =1.52*5.143 = 7.82%

The cost of not taking the cash discount is less than the cost of the loan i.e. 7.82% vs. 10.31%..

 

It is thus advised that the firm should not take the cash discount.

 

E. Interest = $500,000*10.25% = $51,250
Effective interest = Interest/Available funds = $51,250/$400,000 =12.81%

 

F. Profit on future contract = Strike price - Exercise price = $500,000 - $488,000 = $12,000
Extra Interest = $500,000*2% = $10,000

 

It is evident that the firm has effective and efficiently managed to hedge the position as the gains on the bonds (treasury) bonds futures was more. Thus it has offsetted the 2% increase in the cost of funds.

 

I hope the above helps...

Regards,

Milan Vaishnav, Financial Advisor
Category: Finance
Satisfied Customers: 972
Experience: Technical Analyst in Financial Markets -- Experience of more than 10 years in consulting
Milan Vaishnav and other Finance Specialists are ready to help you

JustAnswer in the News:

 
 
 
Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.
 
 
 

What Customers are Saying:

 
 
 
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
< Last | Next >
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
  • I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight. Bonnie Chesnee, SC
  • Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation. John Minneapolis, MN
  • Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with. Orville Hesperia, California
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C. Freshfield, Liverpool, UK
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex Los Angeles, CA
  • Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult. GP Hesperia, CA
 
 
 

Meet The Experts:

 
 
 
  • Rakhi Vasavada

    Financial and Legal Consultant

    Satisfied Customers:

    2073
    Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
< Last | Next >
  • http://ww2.justanswer.com/uploads/RA/rakhi.v/2012-7-3_14374_RakhiVasavadaL.64x64.jpeg Rakhi Vasavada's Avatar

    Rakhi Vasavada

    Financial and Legal Consultant

    Satisfied Customers:

    2073
    Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
  • http://ww2.justanswer.com/uploads/BU/BusinessTutor/2012-2-2_115741_Kouki2.64x64.jpg Manal Elkhoshkhany's Avatar

    Manal Elkhoshkhany

    Tutor

    Satisfied Customers:

    1890
    More than 5000 online tutoring sessions.
  • http://ww2.justanswer.com/uploads/MY/MyVirtualCPA/2012-7-5_44024_cookmegan1.64x64.jpg Megan C's Avatar

    Megan C

    Certified Public Accountant (CPA)

    Satisfied Customers:

    1755
    Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
  • http://ww2.justanswer.com/uploads/JK/jkcpa/2011-1-16_182614_jkcpa.64x64.jpg JKCPA's Avatar

    JKCPA

    CPA

    Satisfied Customers:

    838
    Bachelors degree and CPA with Accounting experience.
  • http://ww2.justanswer.com/uploads/starside8/2010-2-16_55433_DSCN1175.JPG Eric's Avatar

    Eric

    Financial Manager

    Satisfied Customers:

    558
    Loan servicing, counseling and real estate expert. Foreclosure Expert and Financial Planner.
  • http://ww2.justanswer.com/uploads/FA/fastfile/2011-12-15_23139_Klein2011small.64x64.jpg R. Klein, EA's Avatar

    R. Klein, EA

    Accountant

    Satisfied Customers:

    397
    Intuit Ask a Tax Expert. QuickBooks Certified Pro Advisor (all editions)
  • http://ww2.justanswer.com/uploads/dkaplun/2009-05-17_173121_headshot_1_2.jpg Dimitry K., Esq.'s Avatar

    Dimitry K., Esq.

    Attorney

    Satisfied Customers:

    324
    NASD Licensed Rep, 1997-2001, Business Attorney