Problem 16.7 Sunny Coast Enterprises (A) Sunny Coast Enterprises has sold a combination of films and DVDs to Hong Kong Media Incorporated for US$100,000, with payment due in 6 months. Sunny Coast Enterprises has the following alternatives for financing this receivable: 1) Use its bank credit line. Interest would be at the prime rate of 5% plus 150 basis points per annum. Sunny Coast Enterprises would need to maintain a compensating balance of 20% of the loans face amount. No interest will be paid on the compensating balance by the bank; or 2) Use its bank credit line but purchase export credit insurance for a 1% fee. Because of the reduced risk, the bank interest rate would be reduced to 5% per annum without any points.
a. What are the annualized percentage all-in-costs of each alternative?
b. What are the advantages and disadvantages of each alternative?
c. Which alternative would you recommend?