The Xeor supply company needs to increase its working capital Tk. 5.4 million. The following three financing alternatives are available (assume a 365 day year). i) Forgo cash discount (granted on a basis of 5/10, net 30) and pay on the final due date. ii) Borrow Tk. 6 million from a bank at 15 percent interest. This alternative would necessitate maintaining a 12 percent compensating balance. iii) Issue Tk. 5.7 million of six-month commercial paper to net Tk. 5.4 million. Assume that new paper would be issued every six months (Note: commercial paper has no stipulated interest rate. It is sold at a discount, and the amount of the discount determines the interest cost to the issuer.) Requirement: Assuming that the firm would prefer the flexibility of bank financing, provided the additional cost of this flexibility was no more than 3 percent per annum, which alternative should Xeor select? Why?
The Xeor supply company needs to increase its working capital Tk. 5.4 million. The following three financing alternatives are available (assume a 365 day year).
i) Forgo cash discount (granted on a basis of 5/10, net 30) and pay on the final due date.
ii) Borrow Tk. 6 million from a bank at 15 percent interest. This alternative would necessitate maintaining a 12 percent compensating balance.
iii) Issue Tk. 5.7 million of six-month commercial paper to net Tk. 5.4 million. Assume that new paper would be issued every six months (Note: commercial paper has no stipulated interest rate. It is sold at a discount, and the amount of the discount determines the interest cost to the issuer.)
Requirement: Assuming that the firm would prefer the flexibility of bank financing, provided the
additional cost of this flexibility was no more than 3 percent per annum, which
alternative should Xeor select? Why?
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