2 A bank offers a client a choice between two financing options over a one-year period: Option 1: a bullet loan for the full year of 500,000 to be repaid at end year with interest fixed at 12 per cent p.a. Option 2: An overdraft, with a quoted rate of 14 per cent p.a, with interest charged quarterly on the average balance. The firm expects to need finance of 400,000 in the first quarter, 500,000 in quarter 2, 500,000 in quarter 3 and only 200,000 in the final quarter due to the seasonal nature of its business. (These are all quarterly aver- ages). Unused funds can be invested at 2 per cent per quarter. The bank will not charge interest on accumulated quarterly interest charges.

(a) What advice would you give?

(b) What is the break-even rate on the overdraft, assuming the interest rate on the loan is fixed at 12 per cent?