The Kathmandu Electronic Company intends to borrow Rs 800,000 to support its short-term financing requirements during the next year. The financing…
BBS Fundamentals of Corporate Finance · 2081 · Solved Question with Answer
The Kathmandu Electronic Company intends to borrow Rs 800,000 to support its short-term financing requirements during the next year. The financing alternatives offered by the bank include:
Alternative 1: A discount interest loan with a simple interest of 15 percent and no compensating balance requirement.
Alternative 2: A 14 percent simple interest loan that has a 15 percent compensating balance requirement.
Alternative 3: Rs 1 million revolving line of credit with simple interest of 12 percent paid on the amount borrowed and a 1 percent commitment fee.
a. Compute the effective cost (rate) of each financing alternative assuming Kathmandu borrows Rs 800,000. Which alternative should it use?
b. Discuss the factors other than cost to be considered while choosing a bank for short-term loan.