Q.1: The Navana Company LTD. Needs to finance its short term financing needs of tk.4, 80,000. The funds are needed for 9 months. The company is considering the following possibilities:

i) Terminal ware house loan from a finance company. The terms are 13% annualized with an 80% advanced against the value of the inventory. The warehouse costs are tk. 7,500 per month. The residual financial needs which are 48,000 less the amount advanced will need to be financed by foregoing cash discounts on its payables. Standard terms are 2/10 net 45. However, the company feels it can postpone payment until the fortieth day without adverse effect. 

ii) A floating lien arrangement from the bank. The bank will maintain a 15% compensating balance. Bank will charge 16% interest rate.

iii) A factor will buy the company receivables (6, 00,000) which have a collection period of 60 days. The factor  will advance up to 75% of the face value of the receivables at 12% on an annual basis. The factor will also charge a 2% fee on all receivables purchased. It has been estimated that the factor's services will save the company a credit department expenses and bad debt expense of tk. 15, 000 per month.

Requirement:

 

a) Calculate costs for all the three alternatives.

b) Which is the least costly method of financing to the firm?