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please help, its important question. it would be really appreciated You are a consultant for Manfred Systems incorporated, which manufactures equipment for small pint shops.
please help, its important question. it would be really appreciated
You are a consultant for Manfred Systems incorporated, which manufactures equipment for small pint shops. The CFO recently met to discuss refinancing long-term debt that is due and wanted to review possible options for Manfred Systems. The lang-term debt in question is $10 million, which was used to purchase additional manufacturing equipment to meet consumer demand and streamline production, Increasing efficiency and removing bottlenecks in the production process. Enancing details: Debt to refinance =$10,000,000 Option 1: Reborrow the money from the Business. Development Bank of Canada on a five year basis with a flat rate of 8%. The loan balance would be due in five years, but the company must make annual interest payments to the bank. Option 2. Borrow the money from RBC bank using short-tem one-year loans; the first year would be at an interest rate of 63 per aninum. If the company maintains a compensating balance of to\% of the loan, the interest rate will get lowered 105.5% per annum (reduced by 0.581 The CFO is interested in the potential advantages of short-term borrowing to save on interest costs. Required: a. How much would the company need to bonow to acquire the funds required at 5.5% ? Note. The company would also need to boriow to cover the compensating balance requirement ( 2 marks) b. Compare the cost of the one year shoit term loan it the comparty decides to borrow the funds at 6% or wants to borrow and leverage the rate of 5.5% if the compensating balance is covered. Which is less expensive? ( 5 maiks) c Compare the total costs of the fongterin loan fiom the Business Development Bank of Canada with the short term financing option if the following rates are avallables a. How much would the comparty need to borrow to acquire the funds required at 5.5% ? Note: The company would also need to borrow to cover the compensating balance requirement. ( 2 marks) b. Compare the cost of the one year short-term loan if the company decides to bonrow the funds at 6% or wants to bonrow and leverage the rate of 5.5% if the compensating balance is covered. Which is less expensive? (5 marks) c. Compare the total costs of the long term loan from the Business Developenent Bank of Canada with the short term financing option if the following rates are available: Yeat 1:6% Year 2:8\% Year 3:9% Year 4:90 Year 5.4\% Disegard the compensating balance requirement for this question. Which alternative would be best for the company? ( 6 matks) d. What are the advantages and disadvantages of short teimi vs long term financing? Are any other alternatives avallable to the company? Ir you were the CrO of the company, would you adopt a higher riskireward financing policy or a more conservative financing policy? Explain in detail (at least 300 . wordv) Step by Step Solution
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