Weathers Catering Supply, Inc., estimates that because of the seasonal nature of its business, it will require an additional Rs. 2,000,000 for 6…
BBS Fundamentals of Corporate Finance · 2078 · Solved Question with Answer
Weathers Catering Supply, Inc., estimates that because of the seasonal nature of its business, it will require an additional Rs. 2,000,000 for 6 months. Weathers Catering Supply, Inc. has the following four options available for raising the needed funds.
i. State Bank has offered to lend the funds at a 9 percent annual rate subject to a 10% compensating balance. The principal of loans would be payable at maturity as a single sum.
ii. Frost Finance Co. has offered to lend the funds at a 9 percent annual rate with discount-loan terms. The principal of loans would be payable at maturity as a single sum.
iii. Forgo the trade discount of 2/10, net 40 on Rs. 2,000,000 of purchase
iv. Issue Rs. 2,000,000 of 180 day commercial paper at a 9.5 percent per annum interest rate. The total transactions fee, including the cost of backup credit line, on using commercial paper is 0.5 percent of the amount of the issue.
a. Calculate the cost of each financing alternative?
b. Is the source with the lowest expected cost necessarily the one to select? Why or why not?