A Firm has two alternatives: a. to raise a loan of 100,000 €, due in 3 months, at 10% p.a. compounded quarterly; or b. to discount a bill of exchange with par value of 102,600 €, due in 90 days from now, at a discount rate of 10%. Which is the best business decision? Why?

A Firm has two alternatives: a. to raise a loan of 100,000 €, due in 3 months, at 10% p.a. compounded quarterly; or b. to discount a bill of exchange with par value of 102,600 €, due in 90 days from now, at a discount rate of 10%. Which is the best business decision? Why?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 14P

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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

Question

A Firm has two alternatives:
a. to raise a loan of 100,000 €, due in 3 months, at 10% p.a. compounded quarterly; or
b. to discount a bill of exchange with par value of 102,600 €, due in 90 days from now, at a discount rate of 10%.
Which is the best business decision? Why?

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