Cost of Short Term (unsecured) Loan Financing:

Q.1: A company needs tk. 8, 00,000 to meet working capital requirement immediately. It has the
following alternative sources:

I. The company can buy tk. 10, 00,000 of raw materials on terms of 3/30, net 90.
II. A bank will lend tk. 10, 00,000 at 13% interest with 20% compensating balance
requirements.
III. To issue commercial paper of Tk. 10, 00, 000 of six month period and net sale value is 9,
50, 000.

Requirement: Which alternative should the company choose? Why?

CD
∗360 days
Trade Credit Cost: 100−CD
∗100
CP−DP

Interest expense
Cost of Bank Loan: ∗100
Loan Amount−compensating balance

FV −SV
∗360 days
Cost of commercial paper: NSV
∗100
Maturity Period

Q.2: Beximco Ltd. has got tk. 60 lakh revolving credit agreements with IFIC bank at 10%
interest rate per year and 1% commitment fee on the unused portion of the credit. If the company
utilized on average 70% of the total commitment.

Requirement:

i. What is the expected annual cost of this credit agreement?

ii. What is the effective interest rate?
iii. What will be the effective interest rate if the company utilized only 50% of the total
commitment?

Total Interest
Effective interest rate:
Loan Utilized

Q.3: A Cement manufacturing company wants to borrow tk. 10 lakh from Sonali Bank Ltd. For
one year to meet the working capital requirement. The bank has given three alternatives.
 a. 12% loan on a discount basis with 10% and 15% compensating balance requirement.
b. 14% loan on installment basis without compensating balance requirement.
c. 14% loan on discount basis without compensating balance. Which method is the cheapest
one?

Total Interest
Discount basis:
Loan Utilized

2 PC
Installment Basis: (p=no. of installment, c=interest amount, A=amount)
A (N +1)

Cost of Secured Short Term Bank Credit:

Cost of Loan Against Accounts Receivable

Q.4: Bengal Food Ltd. Has an annual credit sales of tk. 20 crore with an average level of
accounts receivable (A/R) of tk. 5 crore. The company is planning to take loan from National
Bank Ltd. NBL pledging its A/R at 16% interest rate to meet working capital requirement. The
bank requires 20% margin on the face value of A/R. Find out the amount of loan available, total
cost of loan and effective rate of interest.

Total Credit Sales during the year

Annual A/R Turnover =
Average AR balance

1
Effective Interest Rate = 1 1 [R= Nominal Interest rate, N= Accounts Receivable
−
R n
Turnover]

360 Days
Average duration of advance =
AR Turnover

Periodical Interest Rate =

Financing by Factoring Accounts Receivable

Q.5: A company total annual credit sale is tk. 8 crore and its average collection period is 90 days.
Past experience indicates that the bad debt loss was 2% and collection and administration cost is
tk. 8 lacs. The factor charges 3% commission and advances up to 90% at 15% interest. How
much the company will get as advance and what is the effective interest rate of factoring the
A/R?

Annual credit Sale∗Average Collection Period

Average Level of Accounts Receivables =
360 days
 360 days
A/R Turnover =
Average collection period

Calculation of net amount of advance = Face value of A/R- (Reserve +Factoring Commission+
Interest).

Calculation of effective interest rate, Net Annual factoring cost = (Annual interest charge
+Annual Factoring Commission)- ( Administrative Cost+ Bad Debt loss).

Annual factoring Costs

EIR=
Net Amount of Advance

Mid Term Loan Financing:

Q.6: Suppose that you borrow tk. 5 lakh at 12% interest rate to be repaid over next 6 years.
Payments will be made in equal installments at the end of each year. How much should be paid
in each installment? You are also required to show the repayment schedule. (Use ballon payment
method and Capital Recovery Method).

p
Capital recovery Method: 1 1 (R= rate of interest)
−
R R(1+ R)n