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How did you compute the interest cost on the table below You need to borrow $10 million for 90 days. You have the following alternatives:
How did you compute the interest cost on the table below You need to borrow $10 million for 90 days. You have the following alternatives: Issue high-grade commercial paper, with a backup line of credit costing .3% a year. a. b. Borrow from First Cookham Bank at an interest rate of .25% over LIBOR. C. Borrow from the Test Bank at prime. Given the rates currently prevailing in the market (see, for example, The Wall Street Journal), which alternative would you choose? The decision of borrowing of funds under the various alternatives depends upon the interest cost associated to the alternative. We should choose the alternative which have the lowest interest cost. The interest rate for the various alternatives will be as follows: Refer to the interest rates for the following categories in "The wall street journal" which are as below: High - Grade Commercial Paper = 0.31% +0.30% back up line for credit costing. = 0.61% Bank interest rate = LIBOR Rate +0.25% = 0.9413% +0.25% = 1.1913% Prime rate = 3.25% Note: (a) The LIBOR rate for the bank interest is the taken from the average of the 52 weeks high and lowest interest rates. (b) The prime rate of interest for US is taken from the average of the 52 weeks high and lowesprime interest rates. The interest cost for the various alternatives will be computed as below: Type of loan Principal (in Million) Rate of interest Peripd Interest cost (Million) Issuance of High-grade commercial paper 0.61% 90 days $0.02 Borrow from First Cookham Bank $10 1.91% 90 days $0.05 Borrow from Test Bank $10 3.25% Jo days $0.08 From the above computation, the alternative which allows the lowest interest cost will be selected. Therefore, Issuance of High-grade Commercial Paper will be chosen having the lowest interest cost of $0.02 million. $10
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