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Effective Cost of Short Term Credit The UFSU Corporation intends to borrow $ 450,000 to support its short- term nancing requirements during the next year.
Effective Cost of Short Term Credit The UFSU Corporation intends to borrow $ 450,000 to support its short- term nancing requirements during the next year. UFSU can nance the requirements by no longer taking discounts, thus increasing accounts payable. UFSU purchases under terms of 2/ 10, net 30, but it can delay payment for an additional 35 days paying in 65 days and thus becoming 35 days past due without a penalty because of its suppliers current excess capacity problems. The company is evaluating its nancing options at the bank where it maintains its checking account. UFSUs checking account balance, which averages $ 50,000, can be used to help satisfy any compensating balance requirements the bank might impose. The nancing alternatives offered by the bank include the following: Alternative 1: A discount interest loan with a simple interest of 9 1/ 4 percent and no compensating balance requirement. Alternative 2: A 10 percent simple interest loan that has a 15 percent compensating balance requirement. Alternative 3: A $ 1 million revolving line of credit with simple interest of 9 1/ 4 percent paid on the amount borrowed and a U4 percent commitment fee on the unused balance. No compensating balance is required. a. Compute the effective cost ( rate) of each of the four nancing alternative assuming UFSU borrows $ 450,000. Which alternative should UFSU use
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