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Compute the effective cost of each financing alternative

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UEFA Inc. intends to borrow $750,000 to support its short-term financing requirements during the next year. The financing alternatives offered by the bank include the following -

Alternative 1: A discount interest loan with a simple interest of 9.50 percent and no compensating balance requirement.

Alternative 2: A 10 percent simple interest loan that has a 15 percent compensating balance requirement.

Alternative 3: A $1 million revolving line of credit with simple interest of 9.50 percent paid on the amount borrowed and a 0.50 percent commitment fee on the unused balance. No compensating balance is required.

Question 1: Compute the effective cost (rate) of each financing alternative assuming UEFA borrows $750,000.

Reference no: EM132602135

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