2B5HH MEGATECH INC. IS A LARGE PUBLICLY-HELD FIRM. THE TREASURER IS...

176.

CSO: 2B5f

LOS: 2B5hh

Megatech Inc. is a large publicly-held firm. The treasurer is making an analysis of the

short-term financing options available for the third quarter, as the company will need an

average of $8 million for the month of July, $12 million for August, and $10 million for

September. The following options are available.

I.

Issue commercial paper on July 1 in an amount sufficient to net

Megatech $12 million at an effective rate of 7% per year. Any

temporarily excess funds will be deposited in Megatech’s investment

account at First City Bank and earn interest at an annual rate of 4%.

II.

Utilize a line of credit from First City Bank with interest accruing

monthly on the amount utilized at the prime rate, which is estimated

to be 8% in July and August and 8.5% in September.

Based on this information, which one of the following actions should the treasurer take?

a.

Issue commercial paper, since it is approximately $35,000 less expensive than the

line of credit.

b.

Issue commercial paper, since it is approximately $14,200 less expensive than the

c.

Use the line of credit, since it is approximately $15,000 less expensive than

issuing commercial paper.

d.

Use the line of credit, since it is approximately $5,800 less expensive than issuing

commercial paper.