The Thompson Corporation projects an increase in sales from $18 million to $25 million, but it needs
Question:
The Thompson Corporation projects an increase in sales from $18 million to $25 million, but it needs an additional $500,000 of current assets to support this expansion. Thompson purchases under terms of 2/10, net 60 and currently pays on the 10th day, taking discounts. The CFO is considering using trade credit to finance the additional working capital required. Alternatively, Thompson can finance its expansion with a one-year loan from its bank.
The bank has quoted the following alternative loan terms:
a) 12 percent rate on a simple interest loan, with monthly interest payments.
b) 10 percent annual rate on a discount interest basis with no compensating balance.
c) 8.75 percent annual rate on a discount interest basis, with a 10 percent compensating balance.
d) 8 percent add-on interest, with monthly payments.
Based strictly on cost considerations only, what should Thompson do to finance its expansion?
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
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Financial management theory and practice
ISBN: 978-0324422696
12th Edition
Authors: Eugene F. Brigham and Michael C. Ehrhardt