question archive 1)The PDM Company Ltd needs to increase its working capital by Tshs 440 million
1)The PDM Company Ltd needs to increase its working capital by Tshs 440 million
Subject:FinancePrice: Bought3
1)The PDM Company Ltd needs to increase its working capital by
Tshs 440 million. The following three financing alternatives are available (assume a 365-day year)
i) Take cash discounts (granted on a basis of "3/10, net 30") and pay on the final due date.
ii) Borrow Tshs 500 million from a bank at 15 percent interest. This alternative would necessitate maintaining a 12 percent compensating balance.
iii) Issue Tshs 470 million of six-month commercial paper to net Tshs 440 million. Assume that the new paper would be issued every six months. (Note: commercial paper discount determines the interest cost of the issuer).
Required:
Assuming the firm would prefer flexibility of bank financing provided the additional cost of this flexibility was no more than 2 percent per annum, which alternative should PDM Company Ltd select? Why?
