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    Solutions Guide: Please Reword The Answers To Essay Type Parts So As To Guarantee That Your Answer Is An Original. Do Not Submit As Your Own

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    Luciano Moreira
    The document discusses three financing strategies - aggressive, conservative, and trade-off - for a company called Kanton. The aggressive strategy relies most heavily on short-term financing and has the lowest costs but highest risk. The conservative strategy uses only long-term financing and has the highest costs but lowest risk. The trade-off strategy balances short and long-term financing and has moderate costs and risk. The document recommends the trade-off strategy for Kanton due to the wide swings in its monthly funding needs. It also analyzes the effective interest rates of two credit options, a line of credit and revolving credit agreement, and recommends the line of credit due to its lower annual interest cost.

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    Solutions Guide: Please Reword The Answers To Essay Type Parts So As To Guarantee That Your Answer Is An Original. Do Not Submit As Your Own

    Uploaded by

    Luciano Moreira
    39 views6 pages
    The document discusses three financing strategies - aggressive, conservative, and trade-off - for a company called Kanton. The aggressive strategy relies most heavily on short-term financing and has the lowest costs but highest risk. The conservative strategy uses only long-term financing and has the highest costs but lowest risk. The trade-off strategy balances short and long-term financing and has moderate costs and risk. The document recommends the trade-off strategy for Kanton due to the wide swings in its monthly funding needs. It also analyzes the effective interest rates of two credit options, a line of credit and revolving credit agreement, and recommends the line of credit due to its lower annual interest cost.

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    2010-11-30_073051_pinigo

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    The document discusses three financing strategies - aggressive, conservative, and trade-off - for a company called Kanton. The aggressive strategy relies most heavily on short-term financing and has the lowest costs but highest risk. The conservative strategy uses only long-term financing and has the highest costs but lowest risk. The trade-off strategy balances short and long-term financing and has moderate costs and risk. The document recommends the trade-off strategy for Kanton due to the wide swings in its monthly funding needs. It also analyzes the effective interest rates of two credit options, a line of credit and revolving credit agreement, and recommends the line of credit due to its lower annual interest cost.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    39 views6 pages

    Solutions Guide: Please Reword The Answers To Essay Type Parts So As To Guarantee That Your Answer Is An Original. Do Not Submit As Your Own

    Uploaded by

    Luciano Moreira
    The document discusses three financing strategies - aggressive, conservative, and trade-off - for a company called Kanton. The aggressive strategy relies most heavily on short-term financing and has the lowest costs but highest risk. The conservative strategy uses only long-term financing and has the highest costs but lowest risk. The trade-off strategy balances short and long-term financing and has moderate costs and risk. The document recommends the trade-off strategy for Kanton due to the wide swings in its monthly funding needs. It also analyzes the effective interest rates of two credit options, a line of credit and revolving credit agreement, and recommends the line of credit due to its lower annual interest cost.

    Copyright:

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    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    of 6

    Solutions Guide: Please reword the answers to essay type parts so as to guarantee

    that your answer is an original. Do not submit as your own.


    (a) Strategy I—Aggressive
    (1) Amount required: $2,500,000 short-term and $1,000,000 long-term
    (2) Cost: (10% × $2,500,000) + (14% × $1,000,000) = $390,000
    Strategy 2—Conservative
    (1) Amount required: $7,000,000 long-term and $0 short-term
    (2) Cost: (14% × $7,000,000) = $980,000
    Strategy 3—Trade-off
    (1)Calculation of short-term requirements
    (1) (2)
    Total Funds Permanent Seasonal
    Month Requirements Requirements Requirements
    January $1,000,000 $3,000,000 $0
    February 1,000,000 3,000,000 0
    March 2,000,000 3,000,000 0
    April 3,000,000 3,000,000 0
    May 5,000,000 3,000,000 2,000,000
    June 7,000,000 3,000,000 4,000,000
    July 6,000,000 3,000,000 3,000,000
    August 5,000,000 3,000,000 2,000,000
    September 5,000,000 3,000,000 2,000,000
    October 4,000,000 3,000,000 1,000,000
    November 2,000,000 3,000,000 0
    December 1,000,000 3,000,000 0
    Monthly Average: Permanent = $3,000,000
    Seasonal = $1,166,667 (sum of seasonal requirements ÷ 12)
    Seasonal = $1,166,667 (14,000,000 ÷ 12)
    (2)Cost: (10% × $1,166,667) + (14% × $3,000,000) = $536,667

    (b) Net working capital = Current assets − Current liabilities


    Aggressive = $4,000,000 − $2,500,000 = $1,500,000
    Conservative = $4,000,000 − $0 = $4,000,000
    Trade-off = $4,000,000 − $1,166,667 = $2,833,333

    (c) The three strategies differ in terms of profitability and risk. The aggressive strategy is the
    most profitableit has the lowest cost, $390,000because it uses the largest amount of the
    less-expensive short-term financing. It also pays interest only on needed financing. The
    aggressive strategy is also the most risky, relying heavily on short-term financing, which
    may have more limited availability. Net working capital is lowest, also increasing risk.
    Because the conservative strategy funds the highest amount in any month for the whole year
    with more-expensive long-term financing, it is the most expensive ($980,000) and the least
    profitable. It is the lowest-risk strategy, however, reserving short-term financing for
    emergencies. The high level of working capital also reduces risk.
    The trade-off strategy falls between the two extremes in terms of both profitability and risk.
    The cost ($536,667) is higher than the aggressive strategy because the permanent funds
    requirement of $3,000,000 is financed with more costly long-term funds. In five months
    (January, February, March, November, and December), the company pays interest on
    unneeded funds. The risk is less than with the aggressive strategy; some short-term
    borrowing capacity is preserved for emergencies. Because a portion of short-term
    requirements is financed with long-term funds, the firm’s ability to obtain short-term
    financing is good.
    Mr. Mercado should consider implementing the trade-off strategy. The wide swings in
    monthly funds requirements make the cost of the conservative strategy very high in
    comparison to the reduced risk. For the same reason, the aggressive strategy is quite risky,
    requiring the firm to raise short-term funds ranging from $1,000,000 to $6,000,000. If it
    should become difficult to arrange short-term financing, Kanton Company would be in
    trouble.
    Note: Other recommendations are possible, depending on the student’s risk preference. Of
    course, the student should present sound reasons for his or her choice of strategy.

    (d) (1) Effective interest, line of credit:


    Interest on borrowing: $600,000 × (7% + 2.5%) = $57,000
    Interest $57,000
    Effective interest = = = 11.88%
    Amount available for use $600,000 × 0.80
    (2)Effective interest, revolving credit agreement:
    Cost of borrowing:
    Interest: $600,000 × (7% + 3.0%) $60,000
    Commitment Fee: $400,000 × 0.5% 2,000
    Total $62,000
    Interest and commitment fee
    Effective interest =
    Amount available for use
    $62, 000
    = = 12.92%
    $600, 000 × 0.80

    (e) The line of credit arrangement seems better, since its annual cost of 11.88% is less than the
    12.92% cost of the revolving loan arrangement. Kanton will save about 1% in terms of
    annual interest cost (11.88% versus 12.92%) by using the line of credit. The only negative is
    that if Third National lacks loanable funds, Kanton may not be able to borrow the needed
    funds. Under the revolving credit agreement, funds availability would be guaranteed.

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