â(Calculating the cost ofâ short-term financing) The R. Morin Construction Company needs to borrow â$100,000 to help finance the cost of a new â$150,000 hydraulic crane used in theâ firm's commercial construction business. The crane will pay for itself in oneâ year, and the firm is considering the following alternatives for financing itsâ purchase:
Alternative A. Theâ firm's bank has agreed to lend the â$100,000 at a rate of 13 percent. Interest would beâ discounted, and a 16 percent compensating balance would be required.â However, theâ compensating-balance requirement is not binding on the firm because it normally maintains a minimum demand depositâ (checking account) balance of â$25,000 in the bank.
Alternative B. The equipment dealer has agreed to finance the equipment with aâ 1-year loan. The â$100,000 loan requires payment of principal and interest totaling â$117,430.
a. Which alternative should Morinâ select?
b. If theâ bank's compensating-balance requirement had necessitated idle demand deposits equal to16 percent of theâ loan, what effect would this have had on the cost of the bank loanâ alternative?
â(Calculating the cost ofâ short-term financing) The R. Morin Construction Company needs to borrow â$100,000 to help finance the cost of a new â$150,000 hydraulic crane used in theâ firm's commercial construction business. The crane will pay for itself in oneâ year, and the firm is considering the following alternatives for financing itsâ purchase:
Alternative A. Theâ firm's bank has agreed to lend the â$100,000 at a rate of 13 percent. Interest would beâ discounted, and a 16 percent compensating balance would be required.â However, theâ compensating-balance requirement is not binding on the firm because it normally maintains a minimum demand depositâ (checking account) balance of â$25,000 in the bank.
Alternative B. The equipment dealer has agreed to finance the equipment with aâ 1-year loan. The â$100,000 loan requires payment of principal and interest totaling â$117,430.
a. Which alternative should Morinâ select?
b. If theâ bank's compensating-balance requirement had necessitated idle demand deposits equal to16 percent of theâ loan, what effect would this have had on the cost of the bank loanâ alternative?
