Problem 1: Gary's Pipe and Steel company expects sales next year to be $800,000 if the economy is strong, $500,000 if the economy is steady, and $350,000 if the economy is weak. Gary believes there is a 20 percent probability the economy is steady, and $350,000 if the economy is weak. Gary believes there is a 20 percent probability the economy is steady, and $350,000 if the economy is weak. Gary believes there is a 20 percent probability.
Problem 2: Procter Micro Computers, Inc. requires $1,200,000 in financing over the next two years. The firm can borrow the funds for 2 years at 9.5 percent interest per year. Mr. Procter decides to do economic forecasting and determines that is he utilizes short-term financing instead, he will pay 6.55 percent interest in the first year and 10.95 percent interest in the second year. Determine the total two year interest cost under each plan. Which play is less costly?
Problem 3: The treasurer of Neiman Supermarkets is seeking a $30,000 loan for 180 days from Wrigley Bank and Trust. The stated interest rate is 10 percent and there is a 15 percent compensating balance requirement. The treasurer always keeps a minimum of $2,500 in the firm's checking account. These funds could count toward meeting any compensating balance requirement. What is the effective rate of interest on this loan?