ToysToysToys Corporation wants to borrow $500,000 for one month.It uses its inventory as collateral for a 16% (APR)loan,under a warehouse arrangement where the warehouse fee is $14,000,paid at the end of the month.What is the EAR of this loan for ToysToysToys?

Question

Quizplus · Accepted Answer

The EAR (Effective Annual Rate) considers both the interest and the warehouse fee. The monthly interest is 16%/12 = 1.33%. The warehouse fee of $14,000 on a $500,000 loan is 2.8%. The total monthly cost is 4.13%, and the EAR is (1 + 0.0413)^12 - 1 = 62.6%.

ToysToysToys Corporation Wants to Borrow $500,000 for One Month