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Manal Elkhoshkhany
Manal Elkhoshkhany, Tutor
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Midland Chemical Co. is negotiating a loan from Manhattan Bank

Customer Question

Midland Chemical Co. is negotiating a loan from Manhattan Bank and Trust. The small chemical company needs to borrow $500,000.
The bank offers a rate of 8 ¼ percent with a 20 percent compensating balance requirement, or as an alternative, 9¾ percent with additional fees of $5,500 to cover services the bank is providing. In either case the rate on the loan is floating (changes as the prime interest rate changes).
The loan would be for one year.
a. Which loan carries the lower effective rate? Consider fees to be the equivalent of other interest.
b. If the loan with a 20 percent compensating balance requirement were to be paid off in
12 monthly payments, what would the effective rate be? (Principal equals amount borrowed minus the compensating balance.)
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 the company 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, the Midland Chemical Co. 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:  Manal Elkhoshkhany replied 4 years ago.

Hello

 

Please click here for the word solution

 

Please click here for the solution in excel

 

 

P.S. If you like my services, please feel free to direct your future posts to me specifically by typing "For BusinessTutor" at the beginning of your post. Should you choose to do this, please try to allow me 48 hours before the deadline. If you need to meet me online for a timed assignment, please advise me of the date and time (EST) you want me to meet you here and I will. Please make sure you take the length of the questions into consideration when making your offer

 

Thank you

Customer: replied 4 years ago.
Thank you. After looking at yours I get it all, except for C. Can you explain this to me as I really need to get this. After that I'll click accept as it looks great. Thank you!
Expert:  Manal Elkhoshkhany replied 4 years ago.

Hello

 

The formula is on the word document, can you double check it and tell me which part you do not understand?

Customer: replied 4 years ago.
Part C the cost of failing to take the discount. I do not understand where all of the numbers came from? The discount percent is the number I do not understand. Where did you get the 360?
Expert:  Manal Elkhoshkhany replied 4 years ago.

Hello again

 

Please click here, tell me if this explains it :)

 

All the best

Manal Elkhoshkhany, Tutor
Category: Finance
Satisfied Customers: 9470
Experience: More than 5000 online tutoring sessions.
Manal Elkhoshkhany and 4 other Finance Specialists are ready to help you
Customer: replied 4 years ago.
Thank you but why would you not use 365 days? After that yes I got it.
Expert:  Manal Elkhoshkhany replied 4 years ago.

Because your book usually uses 360 days :)

 

P.S. See page 245 in your book



Edited by BusinessTutor on 3/24/2010 at 2:54 PM EST
Customer: replied 4 years ago.
How do I request you in the future if needed? Thank you, XXXXX XXXXX great week.
Expert:  Manal Elkhoshkhany replied 4 years ago.

Hello vikgirl,

 

you can direct your future posts to me specifically by typing "For BusinessTutor" at the beginning of your post. Should you choose to do this, please try to allow me 48 hours before the deadline. If you need to meet me online for a timed assignment, please advise me of the date and time (EST) you want me to meet you here and I will. Please make sure you take the length of the questions into consideration when making your offer

 

Thank you

Customer: replied 4 years ago.
Hi, how are you? I recently purchased help from you, and was very pleased with your help. I have my final quiz this week, what would you charge me if I need help on a few questions? I do not know how many questions there are ot how many I may need help with. Do you happen to know how many question are on the finance200 final? Could I set up a time to get help? Would you charge per question or just a flat rate and we set up a mutual time for us to both be on? I do not know if it is times either. Please let me know. Thank you and have a nice day.

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