- 6 Marks
AFM – Nov 2017 – L3 – Q1b – Sources of finance and cost of capital
Analyzing financing alternatives for working capital of GH¢100,000 through bank loan, promissory notes, and cash discount.
Question
Abbot Ltd needs to increase its working capital by GH¢100,000. It has decided that there are essentially three alternatives of financing available. They are:
i) Borrow from a bank at 8%. This alternative would necessitate maintaining a 25% compensation balance.
ii) Issue promissory notes at 7.5%. The cost of placing the issue would be GH¢500 each six months.
iii) Forego cash discount, granted on the basis of 3/10, net 30.
The firm prefers the flexibility of bank financing, and has provided an additional cost of this flexibility to be 1%.
Required: Assess which alternative financing method should be selected.
Find Related Questions by Tags, levels, etc.
- Tags: Bank Loan, Cash discount, Cost Analysis, Financing, Promissory notes, Working Capital
- Level: Level 3
- Topic: Sources of finance and cost of capital
- Series: NOV 2017
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