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The The mber powered by Go @ https://www math.. ?-à C -FLDo Homework-Amanda P.X le Edit View Favorites Tools Help IN-330-Q5134 Corporate Finance 18EWS AmandaParont 162??? 2:09PM lomework: 7-1 MyFinanceLab Homework: Working Capital Managen core: 0 of 4 pts HW Score: 4321%, 172, af 40 18-9 (similar to) Oueston Help Related to Checkpoint 18.2) (Calculating the cost of short-term financing) The R. Morin Construction Company needs to bornow $00,000 to help nance the cost of a nevw 120,000 hydraulic crane used in the fiarm's commercial construction business. The crane wil pay for iselt in one year, and the firm is considering the following atermatives for inancing its purchase Alternative A. The firm's bank has agreed to lend the $80,000 at a rate of 13 percent Interest would be discounted, and a 16 percent compensating balance would be requed However, the compensating-balance requirement is not binding on the fim because it normaly maintains a minimum demand deposit (checking account) balance of $20,000 the bank dealer has agreed to Snance the equipment with 1-year loan The $80,000 loan requires payment of principal and interest totaling 393 104 percent of the loan, what effect would this have had on the cost of the ak a. Which alternative should Morin select? b. If the bank's compensating balance requirement had necessitabed idle demand deposits equal to t6 loan alternative? (Round to hodernal places) a. The cost of Alternative A would be Enter your anawer in the arewer box and then click Check Acener partsExplanation / Answer
Answer (a)
Alternative (A) Loan From Firm Bank
Interest charged by bank on Loan @ 13%
therefore interest = 80000*13% = 10400$
And the minimum amount of compensating balance required to maintain is 16% = 80000*16% = 12800$
The cost of interest on compensating balance is 12800*13% = 1664$
Thereform total cost of loan or total amount required to be paid after 1 year to firm bank is =
= 80000 +10400 + 1664 = 92064$
Alternative (B) In case of loan from the dealer
the total amount of interest and principal is to be paid after 1 year is 93104$
So the alternative A is best that is taking loan from the Firm bank and also the cost is also gets reduced of compensating balance because the firm always maintain balance of 20000$ in his account
Answer (b)
The cost of alternative A would be
(i) in case of not maintaining compensating balance is
= 10400/80000 = 13%
and in case it is required to maintain balance then the cost is
= 10400 + 1664 = 12064$
cost % = 12064/80000 = 15.08%
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