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Question 6 (20 marks) Alphabet Company (ABC) is an electronic manufacturer in Hong Kong. The firm has grown rapidly in recent years, causing a need
Question 6 (20 marks) Alphabet Company (ABC) is an electronic manufacturer in Hong Kong. The firm has grown rapidly in recent years, causing a need for short-term financing. Regarding its sales, a majority are for credit although the rest of them are for cash. The credit sales are financed with short-term borrowings. As a financial manager of ABC, (a) (b) (c) You are told that ABC has a $900,000 line of credit with a 10% compensating balance requirement with ICBC Bank. It means that 10% of the amount borrowed must be left in a non-interest-bearing account. The quoted interest rate is 8%. It is reported that ABC needs $270,000 to purchase inventory. What interest rate is ABC effectively paying? You are also told that ABC had an average of $70,000 in accounts receivable last year. Credit sales were $700,000 per year. ABC factors its receivables by discounting them at 2.5%. Assume 365 days a year. What is the effective interest rate on this source of short-term financing? Critically discuss two decision criteria for determining short-term financing policy of the firm. (word limit: 150 words)
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