Reference no: EM133143504
Question - XYZ, Inc., has a seasonal pattern to its business. It borrows under a line of credit from Central Bank at 1% over prime. Its total asset requirements now (at year end) and estimated requirements for the coming year are in millions):
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Now
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Q1
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Q2
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Q3
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Q4
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Total asset requirements
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$4.0
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$5.2
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$5.4
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$3.2
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$5.8
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Assume that these requirements are level throughout the quarter. At present the company has $4.0 million in equity capital plus long-term debt plus the permanent component of current liabilities, and this amount will remain constant throughout the year.
The prime rate currently is 3.00%, and the company expects no change in this rate for the next year. Mendez Metal Specialties is also considering issuing intermediate-term debt at an interest rate of 5.5%. In this regard, three alternative amounts are under consideration: zero, $0.6 million, and $1.2 million. All additional funds requirements will be borrowed under the company's bank line of credit.
1- What the total borrowing costs for alternative 3: ($1.2 million debt, plus line of credit)? (Assume that there are no changes in current liabilities other than borrowings.)
2- What the total borrowing costs for alternative 2: ($0.6 million debt, plus line of credit)? (Assume that there are no changes in current liabilities other than borrowings.)
3- What the total borrowing costs for alternative 1: (line of credit only)? (Assume that there are no changes in current liabilities other than borrowings.)