Philips N.V. requires Lit 500 million for one year. It can borrow from Banca di Roma at a 15% interest rate. How many lira must Philips borrow to receive this amount if the loan is quoted on a discount basis?

Question

Quizplus · Accepted Answer

To calculate the amount of the loan on a discount basis, we need to use the formula:
Loan amount = Amount needed / (1 - Discount rate × Time)
We know that Philips needs Lit 500 million for one year and the interest rate is 15%. Therefore, the discount rate is 0.15 and the time is 1. Plugging these values into the formula, we get:
Loan amount = 500 million / (1 - 0.15 × 1) = Lit 588 million
Therefore, Philips must borrow Lit 588 million to receive Lit 500 million on a discount basis.

Philips NV