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15. Cash Management Policy Rework Problem 14 assuming:

a. Wildcat maintains a minimum cash balance of $45 million.

b. Wildcat maintains a minimum cash balance of $15 million.

Based on your answers in (a) and (b), do you think the firm can boost its profit by changing its cash management policy? Are there other factors that must be considered as well? Explain.

16. Costs of Borrowing In exchange for a $750 million fixed commitment line of credit, your firm has agreed to do the following:

1. Pay 1.8 percent per quarter on any funds actually borrowed

2. Maintain a 5 percent compensating balance on any funds actually borrowed

3. Pay an up-front commitment fee of .105 percent of the amount of the line Based on this information, answer the following:

a. Ignoring the commitment fee, what is the effective annual interest rate on this line of credit?

b. Suppose your firm immediately uses $550 million of the line and pays it off in one year. What is the effective annual interest rate on this $550 million loan?

17. Costs of Borrowing Stream Bank offers your firm a 7 percent discount interest loan for up to $3 million, and in addition requires you to maintain an 8 percent compensating balance against the amount borrowed. What is the effective annual interest rate on this lending arrangement?

Challenge

(Questions 16-17)

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

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