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Sir according to ur lecture we have an interest benefit of holding cash lesser than that of short term securities so we take the difference. But in one of the questions I was doing, the interest cost of new funds is 12% and that short term securities is 9%. How do we do this?
I would need to see the whole question – if it is in the BPP Revision Kit then tell me the number and name of the question; if it is a past exam question then tell me the name and which exam.
Sir its in the BPP F9 text. Page 130
The full question: Finder Co faces a fixed cost of $4,000 to obtain new funds. There is a requirement for $24,000 of cash over each period of one year for the foreseeable future. The interest cost of new funds is 12% per annum; the interest rate earned on short-term securities is 9% per annum. How much finance should Finder raise at a time?
I only have the Revision Kit 🙂
However, the interest to use in the formula is 12 – 9 = 3%.
Ok sir np, but if u cud just let me know the reason for deducting interest on security from finance cost it wud be great. 🙁
They are paying 12% to borrow the money, but then earning 9% by investing it in the short terms deposits.
So the net cost of the money is the difference of 3%.
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