The R. Morin Construction Company needs to borrow $100,000 to help finance the cost of a new
Question:
The R. Morin Construction Company needs to borrow $100,000 to help finance the cost of a new $150,000 hydraulic crane used in thefirm's commercial construction business. The crane will pay for itself in oneyear, and the firm is considering the following alternatives for financing itspurchase:
Alternative A.Thefirm's bank has agreed to lend the $100,000 at a rate of 13 percent. Interest would bediscounted, and a 15 percent compensating balance would be required.However, thecompensating-balance requirement is not binding on the firm because it normally maintains a minimum demand deposit(checking account) balance of $25,000 in the bank.
Alternative B.The equipment dealer has agreed to finance the equipment with a1-year loan. The $100,000 loan requires payment of principal and interest totaling $116,920.
a. Which alternative should Morinselect?
b. If thebank's compensating-balance requirement had necessitated idle demand deposits equal to 15 percent of theloan, what effect would this have had on the cost of the bank loanalternative?
QUESTION 1) The cost of Alternative A would be WHAT %. (Round to two decimalplaces.)
QUESTION 2) The cost of Alternative B would be WHAT %. (Round to two decimalplaces.)
QUESTION 3) Which alternative should Morinselect?
QUESTION 4) If the banks compensation-balance requirement had necessitated idle demand deposits equal to 16 percent of the loan, the new cost of Alternative A (bank loan alternative) would be what %? (Round to two decimal points)
QUESTION 5) What Alternative A OR B should R. Morin Construction Company select for financing??
Financial Management Principles and Applications
ISBN: 978-0133423822
12th edition
Authors: Sheridan Titman, Arthur Keown, John Martin