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Chapter 3: 4DQ (page 247)

What is the prime interest rate? How does the average bank customer fare in regard to the prime interest rate?

Short Answer

Expert verified

The prime interest rate is offered by the bank to the customers having the highest credit rating. The interest rate offered to the average customers is 1-2% higher than the prime interest rate.

Step by step solution

01

Meaning of prime interest rate

The prime interest rate is the interest rate offered by the bank to its customer that has the highest credit rating. These rates are lower than the bank’s average interest rate as the chances of default are low in this case.

02

The interest rate of an average customer in regard to the prime rate

The interest rate charged by the bank of an average customer is 1-2% higher than the prime interest rate offered by the bank. The prime rate is usually offered to large corporations.

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Most popular questions from this chapter

Bombs Away Video Games Corporation has forecasted the following monthly sales:

January

\(100,000

February

\)93,000

March

\(25,000

April

\)25,000

May

\(20,000

June

\)35,000

July

\(45,000

August

\)45,000

September

\(55,000

October

\)85,000

November

\(105,000

December

\)123,000

Total annual sales

\(756,000

Bombs Away Video Games sells the popular Strafe and Capture video games. It sells for \)5 per unit and costs $2 per unit to produce. A level production policy is followed. Each month’s production is equal to annual sales (in units) divided by 12.

Of each month’s sales, 30 percent are for cash and 70 percent are on account. All accounts receivable are collected in the month after the sale is made.

a. Construct a monthly production and inventory schedule in units. Beginning inventory in January is 25,000 units. (Note: To do part a, you should work in terms of units of production and units of sales.)

In the second year, Fisk Corporation finds that it can reduce ordering costs to \(2 per order but that carrying costs stay the same at \)1.60 per unit. Also, volume remains at 49,000 units per year.

d. What is the total cost of ordering and carrying inventory?

Biochemical Corp. requires $550,000 in financing over the next three years. The firm can borrow the funds for three years at 10.60 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term financing instead, she will pay 8.75 percent interest in the first year, 13.25 percent interest in the second year, and 10.15 percent interest in the third year. Determine the total interest cost under each plan. Which plan is less costly?

Barney’s Antique Shop has annual credit sales of \(1,620,000 and an accounts receivable balance of \)157,500. Calculate the average collection period (use 360 days in a year).

Briefly discuss three types of lender control used in inventory financing.
See all solutions

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