You Want to Borrow R1,000 from a Friend for One

question 65

Multiple Choice

You want to borrow R1,000 from a friend for one year, and you propose to pay her R1,120 at the end of the year.She agrees to lend you the R1,000, but she wants you to pay her R10 of interest at the end of each of the first 11 months plus R1,010 at the end of the 12th month.How much higher is the effective annual rate under your friend's proposal than under your proposal?

• A) 0.00%
• B) 0.45%
• C) 0.68%
• D) 0.89%
• E) 1.00%

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Definitions:

Optimal Average Cash Balance

The ideal amount of cash that a company should hold to minimize costs associated with holding too much or too little cash.

Disbursements

Payments made by a business, usually consisting of expenses, investments, and other financial outlays.

Lower Cash Balance Limit

The minimum amount of cash that a business aims to maintain in its cash reserves to meet emergency or operational needs.

Miller-Orr Model

The Miller-Orr Model is a financial model used to manage cash flow and determine the optimal balance between holding cash versus short-term investments.