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Alternative Financing Arrangements

Suncoast Boats Inc. estimates that, because of the seasonal nature of its business, it will require an additional $$2$ million of cash for the month of July. Suncoast Boats has the following four options available for raising the needed funds.

Establish a $1-$year line of credit for $$2$ million with a commercial bank. The commitment fee will be $0\mathrm{.}5\%$ per year on the unused portion, and the interest charge on the used funds will be $13\%$ per annum. Assume the funds are needed only in July and that there are $30$ days in July and $360$ days in the year.

Forgo the trade discount of $2/10,$ net $40,$ on $$2$ million of purchases during July. Assume there are $360$ days in a year.

Issue $$2$ million of $30-$day commercial paper at a $11\mathrm{.}5\%$ annual interest rate. The total transaction fee $($including the cost of a backup credit line$)$ for using commercial paper is $0\mathrm{.}5\%$ of the amount of the issue.

Issue $$2$ million of $60-$day commercial paper at a $11\%$ annual interest rate plus a transaction fee of $0\mathrm{.}5\%.$ Because the funds are required for only $30$ days, the excess funds $($$$2$ million$)$ can be invested in $11\mathrm{.}4\%$ per annum marketable securities for the month of August. The total transaction costs of purchasing and selling the marketable securities is $0\mathrm{.}4\%$ of the amount of the issue.

What is the dollar cost of each financing arrangement? Do not round intermediate calculations. Round your answers to the nearest dollar.

Line of credit: $

Trade discount $($using nominal rate$)$: $

Trade discount $($using effective rate$)$: $

$30-$day commercial paper: $

$60-$day commercial paper: $

The

$-$Select$-$

has the lowest cost.

Is the source with the lowest expected cost necessarily the one to select?