Community Hospital has annual net patient revenues of $150 million. At the present time, payments received

| August 14, 2017

Community Hospital has annual net patient revenues of $150
million. At the present time, payments received by the hospital are not
deposited for six days on average. The hospital is exploring a lockbox
arrangement that promises to cut the six days to one day. If these funds
released by the lockbox arrangement can be invested at 8 percent, what will the
annual savings be? Assume the bank fee will be $2,000 per month.

2. St. Luke’s Convalescent Center has $200,000 in surplus
funds that it wishes to invest in marketable securities. If transaction costs
to buy and sell the securities are $2,200 and the securities will be held for
three months, what required annual yield must be earned before the investment
makes economic sense?

3. Your firm is considering the following three alternative
bank loans for $1,000,000:

a) 10 percent loan paid at year end with no compensating
balance
b) 9 percent loan paid at year end with a 20 percent
compensating balance
c) 6 percent loan that is discounted with a 20 percent
compensating balance requirement

Assume that you would normally not carry any bank balance
that would meet the 20 percent compensating balance requirement. What is the
rate of annual interest on each loan?

4. An important source of temporary cash is trade credit,
which does not actually bring in cash, but instead slows its outflow. Vendors
often provide discounts for early payment. What is the formula to determine the
effective interest rate if the discount is not utilized?

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