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?
Step 1Working capital (WC) is the current capital of the company which is used for daily operations. It is calculated by current assets less current liabilities.Step 2Formulation of the cost of financing of different alternatives:Computation of the cost of financing of different alternatives:Step 3Therefore, i) ... See the full answer