You Want to Borrow $1,000 from a Friend for One

question 108

Multiple Choice

You want to borrow $1,000 from a friend for one year,and you propose to pay her $1,120 at the end of the year.She agrees to lend you the $1,000,but she wants you to pay her $10 of interest at the end of each of the first 11 months plus $1,010 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%

---

Definitions:

Multiple IRRs

Situations where a project or investment has more than one internal rate of return, occurring with alternating cash flows (positive and negative).

Cash Flows

Cash flow is the net amount of cash being transferred into and out of a business, considered essential for its operation, liquidity, and financial health.

WACC

The Weighted Average Cost of Capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets.

WACC

Weighted Average Cost of Capital (WACC) is the average rate that a company is expected to pay to finance its assets, incorporating the cost of equity and debt.