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.