3. Mendez Metal Specialties, Inc. has seasonal pattern to its business. It borrows under a line of credit from Central Bank at 1 percent over prime. Its total asset requirements now (at year end) and estimate requirements for the coming year are (in millions):

	Now	1st Quarter	2nd Quarter	3rd Quater
Total asset requirements	$4.5	$4.8	$5.5	$5.9

Assume that these requirements are level throughout the quarter. At present the company has $4.5 million in equity capital plus long-term debt plus the permanent component of current liabilities, and this amount will remain constant throughout the year.

The prime rate currently is 11%, and the company expects no change in this rate for the next year. Mendez Metal specialist is also considering issuing intermediate-term debt at an interest rate of 13.5%. In this regard, three alternative amounts are under consideration: zero, $500,000, and $1 million. All additional funds requirements will be borrowed und the companys bank line of credit.

1. Determine the total dollar borrowing costs for short- and intermediate-term debt under each of the three alternatives for the coming year. (Assume that there are no changes in current liabilities other than borrowings.) Which alternative is lowest in cost?

2. Is there a consideration other than expected cost that deserves our attention?