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Chapter 15
Chapter 15
Current
Liabilities
Management
If the firm needs short-term funds, which it can borrow from its bank
at 13%, and if each of the suppliers is viewed separately, which (if
any) of the suppliers discounts should the firm give up?
Thus, the effective cost is 1.787% for 90 days. The effective annual rate
may be calculated as follows:
REH Company has a $2 million RCA. Its average borrowing under the
agreement for the past year was $1.5 million. The bank charges a
commitment fee of 0.5% As a result, they had to pay 0.5% on the
unused balance of $500,000 or $2,500. In addition, REH paid $112,500
in interest on the $1.5 million it actually used. As a result, the effective
annual cost of the RCA was 7.67% [($112,500 + $2500)/$1,500,000].