Problem:
The Rasputin Brewery is considering a public warehouse loan as part of its short-term financing. The firm will require a loan of $500,000. Interest on the loan will be 10% (APR, annual compounding) to be paid at the end of the year. The warehouse charges 1% of the face value of the loan, payable at the beginning of the year.
Required:
Question: What is the Effective Annual Rate of this warehousing arrangement?
Note: Provide support for your rationale.