Cost of borrowing under the second option

Assignment Help Finance Basics
Reference no: EM132623703

In order to launch the new gadget line, Acme is securing investor financing to cover the first year of fixed costs associated with producing the chosen gadget to be paid back after 6 months with a fixed cost of borrowing of $100,000; that is, the lender will charge a fixed dollar amount of $100,000 for the loan regardless of the principle borrowed. A second investor is willing to loan the money under a simple interest payment plan with an annual interest rate of 2.5% and requires the loan be repaid after 6 months. Provide Acme with a detailed comparison of the financing options and determine how each impacts the breakeven analysis below. To do so use the FV formula for simple interest to compare the two options. Determine the rate of interest being charged under the first option. Similarly, determine the cost of borrowing under the second option. What amount of principle must be borrowed in order for the two options to be equivalent?

Gadget A:

Factory Set-Up: $10,000,000/year

Utilities: $50,000/year

Property Taxes: $25,000/year

Salary for Engineers: $185,000

Salary for Hardware Tech: $150,000

Salary for Software Tech: $120,000

Gadget B:

Factory Set-Up: $7,500,000/year

Utilities: $50,000/year

Property Taxes: $25,000/year

Salary for Engineers: $185,000

Salary for Hardware Tech: $150,000

Salary for Software Tech: $120,000

Gadget C:

Factory Set-Up: $12,500,000/year

Utilities: $50,000/year

Property Taxes: $25,000/year

Salary for Engineers: $185,000

Salary for Hardware Tech: $150,000

Salary for Software Tech: $120,000

Reference no: EM132623703

Questions Cloud

Legal requirements for managing patient information : Examine legal requirements for managing patient information, health information documentation, the release of information, and electronic health records.
Prepare journal entries to record transactions on sunland : Prepare the journal entries to record transactions on Sunland Company's books using a periodic inventory system. (If no entry is required)
Return cash to shock-holders : Do you agree that stock buybacks really do not return cash to shock-holders because only those who sell back stock receive the cash.
How disclosure notes are an integral part : Why the notes are a critical process in understanding the financial statements and in evaluating the company's performance and financial health
Cost of borrowing under the second option : What amount of principle must be borrowed in order for the two options to be equivalent?
Observations about success of the agency : Describe your final three to five observations about the success of the agency, highlighting the value of the agency to U.S. citizens,
Explain the development of ethical codes and regulations : Describe two historical events that have influenced the development of ethical codes and regulations for nursing and healthcare research.
Find what is the fair price for aldebaran shares : Aldebaran Investments is expected to pay a dividend, What is the fair price for Aldebaran's shares, if its shareholder require a return of 8% p.a.?
FINA2222 Corporate Financial Policy Assignment : FINA2222 Corporate Financial Policy Assignment Help and Solution, The University of Western Australia - Assessment Writing Service

Reviews

Write a Review

Finance Basics Questions & Answers

  Large number of assets

Firstly a systematic risk is one that deals with a large number of assets and can also be labeled as a market risk, on the other hand a non systematic risk

  Characteristics of the corporate entity are perpetual

Some key characteristics of the corporate entity are perpetual existence (meaning a corporation can outlive its founder[s]) & limited liability

  Identify the financial ratio

What criteria would you use to determine how much to grant, to whom, and under what conditions - identify the criteria you would use to determine

  Compute sustainable rate of growth

Compute sustainable rate of growth and the total asset turnover is 1.40 and the equity multiplier is 1.50

  Estimate the earnings per share that smalltech would have

Assume that SmallTech could have raised the capital by issuing 333,333 shares at the prevailing market price of $ 15 per share.

  Shares of common stock outstanding selling

Best Bagels, Inc. (BB) currently has zero debt. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero growth company. BB's current cost of equity is 13%, and its tax rate is 40%. The firm has 20,000 shares of common stock ou..

  What are the effects of insider trading

What are the effects of insider trading on the pricing of the securities in the market.

  What is operating cash flow for this project

Explain what is the operating cash flow for this project - evaluate a project that will increase annual sales

  Within what range is the plant irr

As the capital budgeting director for Chapel Hill Coffins Company, you are evaluating construction of a new plant. The plant has a net cost of $5 million.

  How does legal system impose risk on a derivatives dealer

Explain how closeout netting reduces the credit risk for two firms engaged in several derivatives contracts?- How does the legal system impose risk on a derivatives dealer?

  Computation of currency positions against dollar

On December 31, 2001 Historic Bank had long positions of 200,000,000 Japanese Yen and 50,000,000 Swiss Francs. The closing exchange rates were ¥92/$ and Swf1.89/$.

  Determine the project’s internal rate of return (irr)

determine the project's internal rate of return (IRR) and its net present value (NPV) at required rates of return equal to 10 percent, 13 percent, and 15 percent.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd