Question
PLEASE DO NOT REFER TO OR COPY ANOTHER CHEGG SOLUTION FOR THIS, NEED STEP BY STEP SOLUTION PLEASE. Mr. Johnny, the finance manager of ABC
PLEASE DO NOT REFER TO OR COPY ANOTHER CHEGG SOLUTION FOR THIS, NEED STEP BY STEP SOLUTION PLEASE.
Mr. Johnny, the finance manager of ABC Textile Company, is contemplating about the most viable way of mobilising funds that have been necessitated by a recent order from a buyer. The required funds amount to $500,000 and the money will be needed for a period of 6 months. Mr. Johnny is particularly eager about the venture because successful completion of this order would mean continued business relationship with this big buyer. He is therefore looking into the possible sources of funding.
After going through its purchase records, Johnny finds out that purchase contracts with two of its suppliers can enable the company to manage the required financing. The first of these suppliers, Decca Yarn Suppliers offers terms 3/15 net 60 and its sales made to ABC textile is approximately $800,000 per year.
The other supplier Titan, sells approximately $650,000 worth dye to ABC on terms 2/20 net 60. However, because of its excess capacity, Titan is agreeable to extend the credit period by another 30 days.
Before choosing from among the two suppliers, Johnny decides to talk to Scott the chief financial officer of XYZ Bank to see if the funds could be borrowed at a cheaper rate. Mr. Scott tells Johnny that the money could be lent to ABC Textile up to $750,000 for six months with renewal for another six months at an annual interest rate of 22% and a compensating balance requirement of 15%.
Putting these information on the table, Mr. Johnny starts to analyse them to finalise which of the three sources would be the most viable based on the cost of borrowing.
Which option should Mr. Johnny choose for managing the short-term funding? Justify your answer with necessary calculations.
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