2. Comparing financing options (beginner). Maytag Limited, the manufacturer of white goods appliances, estimates that because of the seasonal nature of its business, it will require an additional $100 million of cash for the month of July.

Maytag Limited has the following three options available for raising the needed funds:

a. Establish a one-year line of credit for $100 million with a commercial bank.

The commitment fee will be 0.5 percent per year on the unused portion, and the interest charge on the used funds will be 7 percent per annum. Assume that the funds are needed only in July and that there are 30 days in July and 360 days in the year.

b. Forgo the trade discount offered by suppliers of 2/10, net 40 on $100 million of purchases of parts and sub-assemblies during July.

c. Issue $100 million of 30-day commercial paper at a 5.5 percent per annum interest rate. The total transactions fee, including the cost of a backup credit line, on using commercial paper is 0.05 percent of the amount of the issue.

i. What is the dollar cost of each financing arrangement?

ii. Is the source with the lowest expected cost necessarily the one to select?Why or why not?