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.

Solutions

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

Next > < Previous

Related Solutions

Macco Bakers requires additional financing for a 90-day period. Four alternatives are being considered. Additional financing...

Macco Bakers requires additional financing for a 90-day period. Four alternatives are being considered. Additional financing required $ 580,000 a) Establish a line of credit with the bank. The bank will charge a fee to establish the line of credit. interest rate on line of credit 8% fee charged $ 8,000 b) Forgo trade discounts from suppliers on terms of 2/10, net 100. c) Issue commercial paper for 90 days. Discount rate on commercial paper 2.0% d) Obtain a loan...

6. Consider the two loan financing alternatives: Home Value = $180,000 Two Financing Alternatives #1: 70%...

6. Consider the two loan financing alternatives: Home Value = $180,000 Two Financing Alternatives #1: 70% Loan to Value (LTV), 7.5% Interest Rate, 30 Years #2: 80% Loan to Value (LTV), 8% Interest Rate, 30 Years What are the monthly payments with alternatives 1 and 2? What is the incremental borrowing cost for the additional amount borrowed through alternative 2 (i.e., the loan with the higher LTV)? Suppose you expect to relocate after 11 years, but you do not have...

You want to have $2.5 million in real dollars in an account when you retire in...

You want to have $2.5 million in real dollars in an account when you retire in 40 years. The nominal return on your investment is 10.3 percent and the inflation rate is 3.7 percent. What real amount must you deposit each year to achieve your goal? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

A firm with no debt financing has a firm value of $50 million. It has a...

A firm with no debt financing has a firm value of $50 million. It has a corporate marginal tax rate of 35 percent. The firm’s investors are estimated to have marginal tax rates of 22 percent on interest income and a weighted average of 17 percent on stock income. The firm is planning to change its capital structure by issuing $10 million in debt, and repurchasing $10 million of common stock. Based on the information above, answer next 2 questions....

Blossom Company is considering these two alternatives for financing the purchase of a fleet of airplanes....

Blossom Company is considering these two alternatives for financing the purchase of a fleet of airplanes. 1. Issue 51,000 shares of common stock at $40 per share. (Cash dividends have not been paid nor is the payment of any contemplated.) 2. Issue 11%, 10-year bonds at face value for $2,040,000. It is estimated that the company will earn $801,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has...

A company is attempting to select between two financing alternatives. Option 1 is to issue an...

A company is attempting to select between two financing alternatives. Option 1 is to issue an additional $1 million in debt at 8%. The second option is to issue $1 million o common shares at $25/share. The firm currently has $250,000 of 7% debt and 100,000 shares of common outstanding. Its tax rate is 40%. a. What is the indifference point? b. Which option would you choose if the EBIT is projected to be $100,000? c. Which option would you...

Company a & b require $50 million for a 3 year period. To reduce their financing...

Company a & b require $50 million for a 3 year period. To reduce their financing needs, Company A would like to borrow at a fixed rate, whereas Company B would prefer to borrow at a floating rate. The cost to each party of accessing either the fixed or floating rates for a 3 year debt issue is as follows: Borrower Fixed rate available Floating Rate available A 8.5% Prime+ 1.0% B 7.5% Prime+ 0.5% Set up an interest rate...

Your boss has decided to assign you the task of analyzing two financing alternatives for a...

Your boss has decided to assign you the task of analyzing two financing alternatives for a self-storage facility that is a potential investment for the company’s portfolio. Although your company usually develops and operates its own self-storage facilities, a competitor has decided to exit the industry and is selling their portfolio. Here is information on the self-storage facility. The net operating income (NOI) is expected to be $200,000 per year the first year and will increase at a 3.5 percent...

A company with EBIT of $6,000,000 is considering two financing alternatives. The first alternative would have...

A company with EBIT of $6,000,000 is considering two financing alternatives. The first alternative would have interest expense of $2,000,000 and 1,000,000 common shares outstanding, whereas the second would have interest expense of $3,800,000 but only 750,000 shares outstanding. The company is in the 35% tax bracket. Part 1: Construct the bottom half of the income statement (including EPS) for each financing alternative when EBIT is at $6,000,000. Part 2: Construct the bottom half of the income statement (including EPS)...

2016 Dec. 16 Accepted a $13,200, 60-day, 12% note dated this day in granting Wang Lee...

2016 Dec. 16 Accepted a $13,200, 60-day, 12% note dated this day in granting Wang Lee a time extension on his past-due account receivable. 31 Made an adjusting entry to record the accrued interest on the Lee note. 2017 Feb. 14 Received Lee’s payment of principal and interest on the note dated December 16. Mar. 2 Accepted a $10,000, 6%, 90-day note dated this day in granting a time extension on the past-due account receivable from Collins Co. 17 Accepted...

Subjects