Asked by Reylan Davis on Apr 29, 2024
Verified
If your firm had $300,000,the going rate of interest on business loans was 12 percent and your firm's expected profit rate was 17 percent,what would you do with this money?
A) Keep it in the bank.
B) Lend it to a competitor.
C) Use it to finance your own expansion.
Rate Of Interest
The charge, quantified as a percentage of the principal, that a borrower pays to a lender for the privilege of using assets.
Expected Profit Rate
The anticipated return on investment, calculated based on potential revenues and costs.
Business Loans
Credit facilities extended to businesses for various purposes, including capital expenditure, operational costs, and expansion activities, typically with repayment terms.
- Gain insight into how interest rates, future earnings projections, and economic cycles affect choices in investing.
Verified Answer
EW
Emma WilkersonApr 29, 2024
Final Answer :
C
Explanation :
The best choice would be to use the money to finance your own expansion since the expected profit rate of 17 percent is greater than the going rate of interest on business loans of 12 percent. This means that the return on investment would be higher than the cost of borrowing money. Keeping the money in the bank would not generate much return, and lending it to a competitor would not benefit your own firm.
Learning Objectives
- Gain insight into how interest rates, future earnings projections, and economic cycles affect choices in investing.