The RMC Company needs to borrow $100,000 to help finance the cost of a new $150,000 hydraulic crane used in the firm’s commercial construction business. The crane will pay for itself in one year, and the firm is considering the following alternatives for financing its purchase: Alternative A: The firm’s bank has agreed to lend the $100,000 at a rate of 14 percent. Interest is to be discounted, and a 15 percent compensating balance is required. However, the compensating- balance requirement is not binding on the firm because it normally maintains a minimum demand deposit (checking account) balance of $25,000 in the bank. Alternative B: The equipment dealer has agreed to finance the equipment with a one-year loan. The $100,000 loan requires payment of principal and interest totaling $116,300. Which alternative should RMC Company select? If the bank’s compensating-balance requirement had necessitated idle demand deposits equal to 15 percent of the loan, what effect would this have had on the cost of the bank loan alternative? Please Answer Both Questions.
The RMC Company needs to borrow $100,000 to help finance the cost of a new $150,000 hydraulic crane used in the firm’s commercial construction business. The crane will pay for itself in one year, and the firm is considering the following alternatives for financing its purchase: Alternative A: The firm’s bank has agreed to lend the $100,000 at a rate of 14 percent. Interest is to be discounted, and a 15 percent compensating balance is required. However, the compensating- balance requirement is not binding on the firm because it normally maintains a minimum demand deposit (checking account) balance of $25,000 in the bank. Alternative B: The equipment dealer has agreed to finance the equipment with a one-year loan. The $100,000 loan requires payment of principal and interest totaling $116,300. Which alternative should RMC Company select? If the bank’s compensating-balance requirement had necessitated idle demand deposits equal to 15 percent of the loan, what effect would this have had on the cost of the bank loan alternative? Please Answer Both Questions.
Chapter16: Working Capital Policy And Short-term Financing
Section: Chapter Questions
Problem 26P
Related questions
Question
Cost of short-term financing
The RMC Company needs to borrow $100,000 to help finance the cost of a new $150,000 hydraulic crane used in the firm’s commercial construction business. The crane will pay for itself in one year, and the firm is considering the following alternatives for financing its purchase: Alternative A:
The firm’s bank has agreed to lend the $100,000 at a rate of 14 percent. Interest is to be discounted, and a 15 percent compensating balance is required. However, the compensating- balance requirement is not binding on the firm because it normally maintains a minimum demand deposit (checking account) balance of $25,000 in the bank.
Alternative B:
The equipment dealer has agreed to finance the equipment with a one-year loan. The $100,000 loan requires payment of principal and interest totaling $116,300.
- Which alternative should RMC Company select?
- If the bank’s compensating-balance requirement had necessitated idle demand deposits equal to 15 percent of the loan, what effect would this have had on the cost of the bank loan alternative?
Please Answer Both Questions.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Managerial Accounting
Accounting
ISBN:
9781337912020
Author:
Carl Warren, Ph.d. Cma William B. Tayler
Publisher:
South-Western College Pub
Fundamentals Of Financial Management, Concise Edi…
Finance
ISBN:
9781337902571
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
