Dear Divakar,
Based on financial data, the company should use the facility at the bank. The cost of the different types of funding are as following:
Trade credit: (2%/98%)*(365days/(90-30days))=12,42%. The 60 days is the difference between taking the the discount at 30days and by paying the net amount after 90days.
Bank facility:12%
Commercial paper: costs:300.000 per quarter (9,1million-8,8mln). 300.000/8.800.000=3,4%per quarter. This is 13,6 % annually.
The facility is the cheapest.
Regards
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Nicolaas Johannes Breman
Consultant
Conquaestor
Assendelft
Netherlands
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Original Message:
Sent: 08-06-2012 12:33 AM
From: Divakar Puri
Subject: CMA P2 Sec-B Corporate Finance
Good Morning Madam,
I have a question related to P2 Sec-B:
Q. The Duoplan Company is determining the most appropiate source of short-term funding. Trade Credit terms from suppliers are 2/30, net 90. The rate for borrowing at the bank is 12%. The company has also ben approached by an investment banker offering to issue Duoplan's commercial paper. The commercial paper would be issued quarterly in increments of $9.1 million with net proceeds of $8.8 million. Which option is the best for the company to choose & why?
Madam my mail id is puri.divakar@....
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Divakar Puri
Director/Manager
Lafarge Nigeria
Karbala
Iraq
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