The Pawlowski Supply Company needs to increase its working capital by $4.4 million. The following three financing alternatives are available (assume a 365-day year):

a. Forgo cash discounts (granted on a basis of “3/10, net 30”) and pay on the final due date.
b. Borrow $5 million from a bank at 15 percent interest. This alternative would necessitate maintaining a 12 percent compensating balance.
c. Issue $4.7 million of six-month commercial paper to net $4.4 million. Assume that new paper would be issued every six months.

Assuming that the firm would prefer the flexibility of bank financing, provided the additional cost of this flexibility was no more than 2 percent per annum, which alternative should Pawlowski select? Why?

Answer rating: 100% (QA)

a Cost of Trade Credit Discount1 Discount x 365Days after Discount Period Cost of Trade C... View the full answer