Your firm is considering a new credit policy. While its current policy is cash only, the newThe PDM Company Ltd needs to increase its working capital by Tshs $440$ million. The

following three financing alternatives are available $($assume a $365-$day year$)$

i$)$ Take cash discounts $($granted on a basis of $"\frac{3}{10},$ net $30")$ and pay on the final

due date.

ii$)$ Borrow Tshs $500$ million from a bank at $15$ percent interest. This alternative

would necessitate maintaining a $12$ percent compensating balance.

iii$)$ Issue Tshs $470$ million of six$-$month commercial paper to net Tshs $440$ million.

Assume that the new paper would be issued every six months. $($Note: commercial

paper discount determines the interest cost of the issuer$).$

Required:

Assuming the firm would prefer flexibility of bank financing provided the additional cost of

this flexibility was no more than $2$ percent per annum, which alternative should PDM

Company Ltd select? Why?

policy would involve extending credit for one period. Based on the following information

determine if a switch is advisable if the interest rate is $2\mathrm{.}0$ percent per period.