Owing to the seasonal nature of the business, Peter, as a chief financial officer of a listed company, WhatsApp, estimates that the company requires an additional $1,000,000 of cash for the month of January. His assistant provides the following four available plans to raise the needed money.

Plan A: Set up a one-year line of credit for $1,000,000 with a 10% compensating balance requirement. The interest charged on the funds is 10% per annum.

Plan B: Factor the receivables by discounting them by 1%. On average, Peters company has accounts receivables of $1,100,000 and annual credit sales of $16,500,000.

Plan C: Give up the cash discount of 1/15, net 35, on $1,000,000 of purchases during January. Assume 365 days a year.

Plan D: Issue a one-month commercial paper at an annual interest of 6% to raise $1,000,000. The relevant cost for using commercial paper accounts for 0.3% of the total issuance amount.

a Evaluate the Effective Annual Rate (EAR) for each of the above short- term financing plans and advise which option to choose.

b Based on the results on part (a), should you always choose the plan with the lowest financing cost? Discuss.