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Axle Chemical Corporation's treasurer has forecasted a $1 million cash deficit for the next quarter. However, there is only a 50% chance this deficit will actually occur. The treasurer estimates that there is a 20% probability the company will have no deficit at all and a 30% probability that it will actually need $2 million in short-term financing. The company can either take out a 90-day unsecured loan for $2 million at 1% per month or establish a line of credit, costing 1% per month on the amount borrowed plus a commitment fee of $20,000. If excess cash can be reinvested at 9%, which source of financing gives the lower expected cost?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M942954

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