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Typically, most companies use line of credit with a bank to finance its working capital needs as opposed to taking out a bank loan.
Typically, most companies use line of credit with a bank to finance its working capital needs as opposed to taking out a bank loan. Line of credit costs 8% per annum while term loan for 6 months costs 6% per annum. Modern Furnitures has worked out the working capital for the next 6 months as follows:
Month Working Capital :
Month 1: 60,000
Month 2: 70,000
Month 3: 100,000
Month 4: 80,000
Month 5: 60,000
Month 6 40,000
(a) Explain how line of credit will work for Modern Furnitures, indicating the amount of line of credit that will be taken from the bank.
(b) Calculate the amount of interest that the company will pay if line of credit is taken up.
(c) Calculate the amount of interest that the company will pay if term loan is taken up.
(d) Compare the two (2) financing methods and discuss which of these alternatives will be good for the company.
