Axle India Ltd's financial manager has forecast a Rs.1 million cash deficit for thenext quarter. However, there is only a 50% chance this deficit will actuallyoccur. The treasurer estimates that there is a 20% probability the company willhave no deficit at all and a 30% probability that it will actually need Rs.2 millionin short-term financing. The company can either take out a 90-day unsecuredloan at 1% per month or establish a line of credit, costing 1% per month on theamount borrowed plus a commitment fee of Rs.20, 000. Both alternatives alsorequired a 20% compensating balance for outstanding loans. If excess cash canbe reinvested at 9% which source of financing gives the lower expected cost?

amount borrowed plus a commitment fee of Rs.20, 000. Both alternatives also required a 20% compensating balance for outstanding loans. If excess cash can be reinvested at 9% which source of financing gives the lower expected cost?

amount borrowed plus a commitment fee of Rs.20, 000. Both alternatives also required a 20% compensating balance for outstanding loans. If excess cash can be reinvested at 9% which source of financing gives the lower expected cost?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter17: The Management Of Cash And Marketable Securities

Section: Chapter Questions

Problem 1P

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