The Pawlowski Supply Company needs to increase its working capital by $4.4 million. The following…

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The
Pawlowski Supply Company needs to increase its working capital by $4.4 million.
The following three financing alternatives are available (assume a 365-day
year):

a. Forgo
cash discounts (granted on a basis of 3/10, net 30) and pay on the final due
date.

b. Borrow $5
million from a bank at 15 percent interest. This alternative would necessitate
maintaining a 12 percent compensating balance.

c. Issue
$4.7 million of six-month commercial paper to net $4.4 million. Assume that new
paper would be issued every six months.

(Note:
Commercial paper has no stipulated interest rate. It

The
Pawlowski Supply Company needs to increase its working capital by $4.4 million.
The following three financing alternatives are available (assume a 365-day
year):

a. Forgo
cash discounts (granted on a basis of 3/10, net 30) and pay on the final due
date.

b. Borrow $5
million from a bank at 15 percent interest. This alternative would necessitate
maintaining a 12 percent compensating balance.

c. Issue
$4.7 million of six-month commercial paper to net $4.4 million. Assume that new
paper would be issued every six months.

(Note:
Commercial paper has no stipulated interest rate. It is sold at a discount, and
the amount of the discount determines the interest cost to the issuer.)
Assuming that the firm would prefer the flexibility of bank financing, provided
the additional cost of this flexibility was no more than 2 percent per annum,
which alternative should Pawlowski select? Why?

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