SOURCES OF SHORT-TERM FUNDS (PROBLEMS)

Trade credit
1. If a firm is given a trade credit terms of 2/10, net 30, then the cost to the firm failing to take the discount is:
A. 2.0%.
B. 30.0%.
C. 36.7%
D. 10.0%.

2. The cost of discounts missed on credit terms of 2/10, n/60 is:

A. 2.0 percent
B. 14.9 percent
C. 12.4 percent
D. 21.2 percent

Bank loans
Discount loan
3. You plan to borrow P10,000 from your bank, which offers to lend you the money at a 10 percent nominal,
or stated, rate on a one-year loan. What is the effective interest rate if the loan is a discount loan?
A. 10.00%
B. 11.11%
C. 12.45%
D. 14.56%

Discount loan with compensating balance

4. What is the effective rate of a 15% discounted loan for 90 days, P200,000, with 10% compensating
balance? Assume 360 days per year.
A. 20.0%
B. 15.0%
C. 17.4%
D. 22.2%

Compensating balance with interest

5. The Premiere Company obtained a short-term bank loan for P1,000,000 at an annual interest rate 12%. As
a condition of the loan, Premiere is required to maintain a compensating balance of P300,000 in its
checking account. The checking account earns interest at an annual rate of 3%. Premiere would otherwise
maintain only P100,000 in its checking account for transactional purposes. Premiere’s effective interest
costs of the loan is
A. 12.00%
B. 14.25%
C. 16.30%
D. 15.86%

Add-on
6. Perlas Company borrowed from a bank an amount of P1,000,000. The bank charged a 12% stated rate in
an add-on arrangement, payable in 12 equal monthly installments.
A. 22.15%
B. 24.00%
C. 25.05%
D. 12.70%

Financing alternative
7. A company has accounts payable of P5 million with terms of 2% discount within 15 days, net 30 days (2/15
net 30). It can borrow funds from a bank at an annual rate of 12%, or it can wait until the 30th day when it
will receive revenues to cover the payment. If it borrows funds on the last day of the discount period in order
to obtain the discount, its total cost will be
A. P 51,000 less
 B. P100,000 less
C. P 75,500 less
D. P 24,500 more

8. Every 15 days a company receives P10,000 worth of raw materials from its suppliers. The credit terms for
these purchases are 2/10, net 30, and payment is made on the 30th day after each delivery. Thus, the
company is considering a 1-year bank loan for P9,800 (98% of the invoice amount). If the effective annual
interest rate on this loan is 12%, what will be the net peso savings over the year by borrowing and then
taking the discount on the materials?
A. P3,624
B. P1,176
C. P4,800
D. P1,224

9. An invoice of a P100,000 purchase has credit terms of 1/10, n/40. A bank loan for 8 percent can be arranged
at any time. When should the customer pay the invoice?
A. Pay on the 1st
B. Pay on the 10th
C. Pay on the 40th
D. Pay on the 60th

10. The Peninsula Commercial Bank and Island Corporation agreed to the following loan proposal:
• Stated interest rate of 10% on a one-year discounted loan; and
• 15% of the loan as compensating balance on zero-interest current account to be maintained by Island
Corporation with Peninsula Commercial Bank.
The loan requires a net proceeds of P1.5 million. What is the principal amount of loan applied for as part
of the loan agreement?
A. P1,666,667
B. P2,000,000
C. P1,764,706
D. P1,125,000

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