Which alternative would you recommend

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Reference no: EM132000653

Sunny Coast Enterpises (A). Sunny Coast Enterprises has sold a combination of films and DVDs to Hong Kong Media Incorporated for US$100,000 with payment due in six months.

Sunny Coast Enterprises has the following alternatives for financing this receivable: (1) Use its bank credit line.

Interest would be at the prime rate of 5% plus 150 basis points per annum. Sunny Coast Enterprises would need to maintain a compensating balance of 20% of the loan's face amount.

No interest will be paid on the compensating balance by the bank. (2) Use its bank credit line but purchase export credit insurance for 1% fee. Because of the reduced risk, the bank interest rate would be reducted to 5% per annum without any points.

A. What are teh annualized percentge all-in costs of each alternative?

B. What are the advantages and disadvantages of each alternative?

C. Which alternative would you recommend?

Reference no: EM132000653

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