Reference no: EM133188345

Question - Burlap Ltd manufactures burlap sacks for the transport of maize at a very large scale and the company has experienced volatile short-term funding requirements over the past year. The management of the company wishes to change the way it funds its short-term funding requirements of R10,000,000.

Currently, the company has an estimated long-term borrowing cost of 3% (variable) and access to a short-term facility at a cost of 3.5%, capped to R3,000,000, and a revolving credit facility of R7,000,000 at a rate of 4%. The management of the company has further determined that its permanent funding requirements are 70% of its total short-term funding requirement. The management also decided that R1,000,000 of capacity on either the short-term facility or revolving credit should be left unused and kept in reserve for emergency use.

It was recently discussed at a management meeting that the company should change from its current aggressive short-term financing plan as it has run out of capacity more than once over the past year and costly quick-access short term loans had to be arranged to make up the shortfall.

Required - Determine the least costly approach the company could take to finance its short-term financing needs. Then, briefly discuss the advantages and disadvantages of this approach compared to the current approach followed by Burlap Ltd.