Concern about the cost of borrowing

Assignment Help Financial Management

Reference no: EM131869776

Assume that a particular firm has a total asset of $200 million and it has to choose a financing scheme among three ones. The description of these schemes is given below.

A. Scheme 1: Borrowing today a unique amount equal to 25% of the total assets value. This borrowed amount will be paid off at the end of year 5 and the interests charges will be based on a 5.25% yearly fixed interest rate.

B. Scheme 2: Borrowing today a unique amount equal to 25% of the total assets value. The banker offered the firm a fully amortizing for 5 years at a 5.25% annual rate. The payment should be paid at the end of each year.

C. Scheme 3: Borrowing at the end of each year 5% of the of the total assets value (i.e., borrow $10 million at the end of each year for 5 years). The total borrowed amount will be paid off at the end of year 5 and the interests charges will be based on an annual 4.25% fixed interest rate.

What would you recommend to the CFO (Chief Financial Officer) if we suppose that he has concern about the cost of borrowing and that he would choose the financing scheme that minimizes the amount of interest paid on the financing period? Document your computations and findings.

Reference no: EM131869776

Questions Cloud

Some of these events are classified as operating activities : On the statement of cash flows, some of these events are classified as operating activities,

What is net annual equivalent uniform annual cost associated : What is the net annual equivalent uniform annual cost associated with replacing the old machine tools now at an interest rate of 15%

Money market instrument computed using discount yield : Which of the following will increase the price of a money market instrument computed using a discount yield?

Calculate the price of call option expiring in two periods : Calculate the price of a call option expiring in two periods with an exercise price of $40.

Concern about the cost of borrowing : What would you recommend to the CFO (Chief Financial Officer) if we suppose that he has concern about the cost of borrowing

Marr would the company be indifferent between two options : A technology company is planning on introducing a new fitness watch to the market. At what MARR would the company be indifferent between the two options?

Offered by doctor office differ from those offered by bank : In terms of this characteristic, how do the services offered by a doctor’s office differ from those offered by a bank?

Construct direct labor budget for next two months : Construct direct labor budget for next two months, assuming that direct labor work force is fully adjusted to total direct labor-hours needed each month.

What is opportunistic investing and real estate cycle : What is Opportunistic Investing? What is the Real Estate Cycle? Define Market Rents?

User Account

All Pages