SOLUTION AT Australian Expert Writers
a) Use the following information to answer the question (i-iv) below.
Taggart Transcontinental needs a $100,000 loan for the next 30 days. Taggart has three alternatives available:
Alternative #1: Forgo the discount on its trade credit agreement that offers terms of 2/5 net 35.
Alternative #2: Borrow the money from Bank A, which has offered to lead the firm $100,000 for one month at an APR of 9%. The bank will require a (no-interest) compensating balance of 10% of the face-value of the loan and will charge a $200 loan origination fee, which means that Taggart must borrow even more than the $100,000 they need.
Alternative #3: Borrow the money from Bank B, which has offered to lend the firm $100,000 for one month at an APR of 12%. The loan has a 1% origination fee.
(i) What is the effective annual rate for Taggart if they choose alternative #1?
(ii) What is the effective annual rate for Taggart if they choose alternative #2?
(iii) What is the effective annual rate for Taggart if they choose alternative #3?
(iv) Which alternative should Taggart choose? Explain why
b) What is the difference between a real option and a financial option? Why does real option add value to an investment decisions?
c) It is commonly argued that financing permanent working capital with short-term debt is an aggressive financing policy and is considered risky. Discuss in your own words why might a company choose to finance permanent working capital with short term debt?
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