The Thompson Corporation projects an increase in sales from
The Thompson Corporation projects an increase in sales from $18 million
to $25 million, but it needs an additional $500,000 of current assets to
support this expansion. Thompson purchases under terms of 2/10, net 60
and currently pays on the 10th day, taking discounts. The CFO is
considering using trade credit to finance the additional working capital
required. Alternatively, Thompson can finance its expansion with a
one-year loan from its bank. The bank has quoted the following
alternative loan terms: [30 points] a) 12 percent rate on a simple
interest loan, with monthly interest payments. b) 10 percent annual rate
on a discount interest basis with no compensating balance. c) 8.75
percent annual rate on a discount interest basis, with a 10 percent
compensating balance. d) 8 percent add-on interest, with monthly
payments. Based strictly on cost considerations only, what should
Thompson do to finance its expansion?
.
acc week