(Cost of short-term financing) The R. Morin Construction Company needs to borrow $80,000 to help finance the cost of
Posted: Thu Apr 28, 2022 1:48 pm
(Cost of short-term financing) The R. Morin Construction
Company needs to borrow $80,000 to help finance the cost of a new
$112,000 hydraulic crane used in the firm's commercial
construction business. The crane will pay for itself in 1 year,
and the firm is considering the following alternatives for
financing its purchase: Alternative A-The firm's bank has agreed
to lend the $80,000 at a rate of 13 percent. Interest would be
discounted, and a 15 percent compensating balance would be
required. However, the compensating-balance requirement would not
be binding on R. Morin because the firm normally maintains a
minimum demand deposit (checking account) balance of
$20,000 in the bank. Alternative B-The equipment dealer has
agreed to finance the equipment with a 1-year loan. The $80,000
loan would require payment of principal and interest totaling
$92,568.
a. Which alternative should R. Morin select?
b. If the bank's compensating-balance requirement were to
necessitate idle demand deposits equal to 15 percent of the loan,
what effect would this have on the cost of the bank loan
alternative?
Company needs to borrow $80,000 to help finance the cost of a new
$112,000 hydraulic crane used in the firm's commercial
construction business. The crane will pay for itself in 1 year,
and the firm is considering the following alternatives for
financing its purchase: Alternative A-The firm's bank has agreed
to lend the $80,000 at a rate of 13 percent. Interest would be
discounted, and a 15 percent compensating balance would be
required. However, the compensating-balance requirement would not
be binding on R. Morin because the firm normally maintains a
minimum demand deposit (checking account) balance of
$20,000 in the bank. Alternative B-The equipment dealer has
agreed to finance the equipment with a 1-year loan. The $80,000
loan would require payment of principal and interest totaling
$92,568.
a. Which alternative should R. Morin select?
b. If the bank's compensating-balance requirement were to
necessitate idle demand deposits equal to 15 percent of the loan,
what effect would this have on the cost of the bank loan
alternative?