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?