Question

In: Economics

Suppose a firm can approach 20 different savers when seeking to acquire financing for a capital...

Suppose a firm can approach 20 different savers when seeking to acquire financing for a capital expenditure. It costs the firm 1.5 units of the consumption good to meet with each potential lender. The capital expenditure project requires 3,000 units of the consumption good to complete. Alternatively, the firm could go a single bank, at the same cost (1.5 units per loan), to acquire the loan.

  1. (4 points) Compute the savings to the firm by going to the bank instead of the individual savers.

Solutions

Expert Solution

a.

Total cost to meet lenders = Cost of each meeting × Number of lenders

                                                = 1.5 × 20

                                                = 30 units

Instead, the firm can acquire the whole 3,000 units from a single bank. In that case the cost is 1.5 units.

Therefore, savings would be the difference.

Savings = Total cost to meet lenders – Total cost to meet a bank

            = 30 – 1.5

            = 28.5 units (Answer)


Related Solutions

Financial experts are familiar with various ways companies can raise capital for financing the firm. Each...
Financial experts are familiar with various ways companies can raise capital for financing the firm. Each of the several sources of funds has associated with it some advantages as well as drawbacks that should be considered in choosing among them. Compare and contrast the advantages and disadvantages for financing the firm by issuing common stock versus issuing corporate bonds versus obtaining loans from private lenders.
List and explain different ways a firm can raise capital. Include in your discussion the different...
List and explain different ways a firm can raise capital. Include in your discussion the different underwriting methods firms could use.
Firm A and firm B have the same expected returns, but different methods of financing. Firm...
Firm A and firm B have the same expected returns, but different methods of financing. Firm A has taken on debt in t = 0 and has to pay back 18735158.0864 in t = 5. Firm A has also issued 100000 shares in t = 0. Firm B has no debt, but has issued 120000 shares. Each share of firm B cost $250 when issued in t = 0. The annual interest rate is 6%. How much did one share...
{capital financing} Are the ways in which hospitals obtain capital different from the ways in which...
{capital financing} Are the ways in which hospitals obtain capital different from the ways in which doctors obtain capital? Why?
Explain the different between the entity approach and the enterprise approach when a country designs a...
Explain the different between the entity approach and the enterprise approach when a country designs a policy that affects the operation of a MNC.
Firms A & T are both 100% equity financed. Firm A can acquire firm T for...
Firms A & T are both 100% equity financed. Firm A can acquire firm T for K330,000 in the form of either cash or stock. The Synergy value of the deal is k60, 000. The following information relates to the two companies                                                                                A                         T No.of Shares                                                       50,000              25,000 Price per share                                                        K30                    k12 EPS                                                                              k3                        k3 Market value                                               k1,500,00           k300,000 P/E         Ratio                                                         10X                     4X Required: 1. What is the merger...
Capital structure is the proportion of debt and equity financing of a firm. It indicates how...
Capital structure is the proportion of debt and equity financing of a firm. It indicates how the company operation of a business is financed. There are several theories that have been discussed in the literature regarding capital structure. Compare and contrast Pecking Order Theory and Asymmetric Information Theory. the answer should 400 words Asmah Enterprise is a business dealing in pain reduction medication. It has a required return on its assets of 18%. It can borrow in the debt market...
Governments can incur debt when: covering deficits, financing capital projects, and covering short periods within a...
Governments can incur debt when: covering deficits, financing capital projects, and covering short periods within a fiscal year in which bills exceed cash on hand. Although this is a common practice, there are argument pro and against governments borrowing money. The debate is ongoing. Using the reading materials for this class please answer the following questions. Describe the advantages of government money borrowing. Describe the disadvantages of government money borrowing. In your opinion, should governments borrow money? Why? Why not?...
A cash-strapped firm would like to acquire a capital asset to use for the next fifteen...
A cash-strapped firm would like to acquire a capital asset to use for the next fifteen years. It can purchase the asset, which costs $50M, by taking out a fifteen-year balloon loan at 5.8% annual interest rate. The firm plans to sell the asset at book value for $15M at the end of the fifteen-year period. Alternatively, the firm can lease the asset from the manufacturer for $4.75M a year. It is agreed, after negotiating, that the lessor would be...
Access to Financing: PayDay loans are one form of financing that consumers can use when they...
Access to Financing: PayDay loans are one form of financing that consumers can use when they have insufficent cash to pay bills. Borrowers often can't access other methods of financing, because of a poor credit score (credit card) or lack of homeownership (home equity loans). States often have laws to limit the amount that PayDay lenders can charge for these short-term loans. For example, the state of Alabama has a law that limits the finance charge or interest rate to...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT