Agriculture Reference
In-Depth Information
borrowing options. Assume the tax rate for Woods Landscaping is 30 percent and the simple
rate of interest is 6 percent.
Questions
Given this information, please answer the following questions. Show the formula used to
arrive at your answer. Note: the fi rst four questions ask for two answers, one in dollars and
the other in percent.
1.
Calculate the amount of interest paid and the effective interest rate for a simple interest
loan.
2.
Calculate the amount of interest paid and the effective interest rate if this loan also
requires a compensating balance of $20,000.
3.
Calculate the amount of interest paid and the effective interest rate if this loan is a dis-
counted loan.
4.
If this was a one-year installment loan with 12 equal, monthly payments, show the APR
and the amount of interest paid on the loan.
5.
What is the after-tax cost of borrowing for Woods Landscaping? How would this change
if the fi rm was in the 25 percent tax bracket rather than the 30 percent tax bracket? What
does this say about debt versus equity fi nancing?
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