BRCC is evaluating two options for funding its working capital during the next year. Option one is borroeing from the bank using a 180-day discount interest loan which has a quoted interest rate equal to 7.8% and requires a 20% compensating balance. BRCC normally maintains an average checking account balance of $5,000. Option two is to issue 180-day commercial paper which has an anual interst rate equal to 8.8% and requires BRCC to pay a transaction fee equal to 0.25%. (a) If BRCC actually needs $225,000 to finance working capital durng the next year, how much must BRCC borrow with each option so that $225,000 can be used to pay bills? (b) which option is better?
BRCC is evaluating two options for funding its working capital during the next year. Option one is borroeing from the bank using a 180-day discount interest loan which has a quoted interest rate equal to 7.8% and requires a 20% compensating balance. BRCC normally maintains an average checking account balance of $5,000. Option two is to issue 180-day commercial paper which has an anual interst rate equal to 8.8% and requires BRCC to pay a transaction fee equal to 0.25%. (a) If BRCC actually needs $225,000 to finance working capital durng the next year, how much must BRCC borrow with each option so that $225,000 can be used to pay bills? (b) which option is better?
Chapter19: Lease And Intermediate-term Financing
Section: Chapter Questions
Problem 17P
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BRCC is evaluating two options for funding its working capital during the next year. Option one is borroeing from the bank using a 180-day discount interest loan which has a quoted interest rate equal to 7.8% and requires a 20% compensating balance. BRCC normally maintains an average checking account balance of $5,000. Option two is to issue 180-day commercial paper which has an anual interst rate equal to 8.8% and requires BRCC to pay a transaction fee equal to 0.25%. (a) If BRCC actually needs $225,000 to finance working capital durng the next year, how much must BRCC borrow with each option so that $225,000 can be used to pay bills? (b) which option is better?
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