The treasurer of Lights-a-Lot Mfg Company is faced with three alternative bank loans. The firm wishes to select the one that minimizes its cost of credit on a $200,000 note that it plans to issue in the next 10 days. Relevant information for the three loan configuration is as follows.
a. An 18% rate of interest with interest paid at the end of the loan period and no compensating balance requirement
b. A 16% of interest and a 20% compensating balance requirement. This loan also calls for interest to be paid at the end of the loan period
c. A 14% rate of interest that is discounted plus a 20% compensating balance requirement.
Analyze the cost of each of these alternatives. You may assume the firm would not normally maintain any bank balance that might be used to meet the 20% compensating balance requirement of alternatives (b) and (c). the loan period is one year.