Question
You are the financial manager of Pipeline Pharmaceuticals. You need to raise nearly $450,000 to finance your working capital needs for 3 months. You have
You are the financial manager of Pipeline Pharmaceuticals. You need to raise nearly $450,000 to finance your working capital needs for 3 months. You have two options. The first is to issue a commercial paper with a face value of $450,000 and net proceeds of $440,000. The second option is to take out a $500,000 loan from Prime Time Bank at a 10% APR. The bank requires a compensating balance equivalent to 10% of the loan principal; this compensating balance will earn 1.2% APR. As a prudent manager, you will use the cheaper of the two options. Which option will you choose?
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