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12. A firm requires 2.5 million dollars in financing for a 60-day period. Two alternatives are...

12. A firm requires 2.5 million dollars in financing for a 60-day period. Two alternatives are being considered. Find the cost of each alternative and then decide which alternative should be selected. a. Establish a line of credit with the bank at an interest rate of 14 percent. The bank will require a 10 percent compensating balance. Forgo trade discounts from suppliers on terms of 1.5/15, net 60.

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Expert Solution

Loan Amount = $ 2.5 Mn

Compensating Bal= $ .25 Mn

Interest Cost = 14 Percent

Interest for 1 Year= $ 2.5 Mn * 14%= $ .35 Mn

Net Usable Loan= $ 2.25 Mn

Cost of Loan= $ .35/$ 2.25*100

= 15.56%

To forgo Supplier's Credit

1.5 Percent in 15 Days net 60

Net Days Difference= 60-15= 45 Days

Annual Cost to Forgo Supplier Credit= 1.5/45*360

=12 Percent

Hence, to forgo supplier's credit is more beneficial.

jeff jeffy answered 2 years ago
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