Corporate Finance

A corporation has a seasonal pattern to its business. It borrows under a line of credit from
the Bank at 1 percent over prime. Its total asset requirements now (at year-end), and estimated requirements for the coming year are as follow:
Total Asset requirements
Now $4,500,000
1st Quarter $4,800,000
2nd Quarter $ 5,500,000
3rd Quarter $5,900,000
4th Quarter $5,000,000
Assume that these requirements are level throughout the quarter. Presently, the company has $4.5 million in equity capital plus long-term debt plus the permanent component of current liabilities, and this amount will remain constant throughout the year.
T·he prime rate presently is 11 percent, and the company expects no change in this rate for the next year. The company also considering issuing intermediate term debt at an interest rate of 13.5 %. Three alternative amounts are under consideration: Zero, $500,000 and $1 million. All additional funds requirements will be borrowed under the company’s bank line of credit.
a. Determine the total dollar borrowing cost for short and intermediate-term debt under each of the three alternatives for the coming year. (Assume that there are no change in current liabilities other then borrowing) Explain which alternative is lowest in cost.

b. Is there a consideration other than expected cost that deserves our attention?