University of San Jose Recoletos

College of Commerce

Management Advisory Services III

J.Echivarria

1. Sheer Company received a line of credit from its bank. The interest rate is 15%,
which is to be deducted in advance. The line of credit agreement requires that
an amount equal to a fifth of the loan be deposited in to a compensating balance
account. The company took advantage of the entire usable amount of the loan
and received the proceeds of P780,000. How much is the principal amount of
the loan?

2. Wewe Company was given a P800,000 line of credit from Popo Bank. The stated
interest rate is 12%. Compute the cost of credit under the following independent
circumstances:

a. The bank requires a compensating balance of 10% and the Company

takes the entire usable amount under a regular loan agreement. The
Company does not usually maintain accounts with the bank.
b. The bank requires a compensating balance of 15% and the company takes
only 50% of the credit line amount. The company has an existing account
with the bank with a balance of P20,000.
c. The company takes 80% of the credit line and is required to maintain a
compensating balance which is 25% of net proceeds. This is the first time
that the Company is transacting with the bank.
d. The Company takes advantage of the entire credit line but has to maintain
a 20% compensating balance? The loan is in a discounted arrangement.
e. The entire available credit is taken by the company through a discounted
loan agreement. The bank has an existing account with the bank which
should be used for the 10% compensating balance requirement. The
account has a current balance of P10,000.
f. The company takes only one-fourth of the credit line and has to maintain a
compensating balance which is equivalent to 10% of the net proceeds of
the discounted loan. The company does not have any previous
transactions with the bank.
g. The credit line is a revolving credit line that bears a commitment fee rate
of 4%. The company loaned P550,000 from the bank.
h. The credit line is a revolving credit line that bears a commitment fee rate
of 1%. The company had a discounted loan of P300,000 from the bank.
The required compensating balance is 5%. The company has no existing
account with the bank.
i. The credit line is a revolving credit line that bears a commitment fee rate
of 10%. The company loaned 90% of the credit line amount with no
required compensating balance. The loan is discounted.

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 j. The loan is a discounted loan. The net proceeds of the loan is P500,000.
The compensating balance is 20% of the net proceeds. The company has
no existing account with the bank.

3. RM Corporation has the following credit terms with its suppliers: Compute the
cost of credit for each supplier

Supplier Credit Terms

Andy 2/10 net 50
Mark 3/5 net 30
Ryan 2/20 net 60
Filjun 3/10 net 30
Anthony 3/15 net 40
Clark 2/30 net 60
Georel 1/10 net 15
Juls 2/15 net 30
Darlon 5/5 net 30

Additional Data:
Filjun was paid 7 days after the term of the credit ended.
Darlon was paid within the discount period.
The payment for Andy was made on the day after the discount period
lapsed.
Clark was paid 5 days after the discount period.
Juls was paid 30 days after the credit term.
Ryan was paid on the 20th day of the credit term.

4. A company obtained a short term bank loan to finance a financial need of

P600,000. The annual interest rate is 10%. The bank requires that a
compensating balance of 20% of the net proceeds is to be maintained in the
borrowers account. Even before the approval of the loan, the company has been
maintaining a balance of P50,000 in the account.

Requirements:
a) Determine the principal of the loan.
b) Determine the effective rate of interest.

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