Permanent assets financing
Wicker Corporation is determining whether to support $100,000 of its permanent current assets with a bank note or a short-term bond. The firm's bank offers a two-year note where the firm will receive $100,000 and repay $118,810 at the end of two years. The firm has the option to renew the loan at market rates. Alternatively, Wicker can sell 8.5 percent coupon bonds with a 2-year maturity and $1,000 par value at a price of $973.97. How many percentage points lower is the interest rate on the less expensive debt instrument?© BrainMass Inc. brainmass.com October 1, 2020, 11:19 pm ad1c9bdddf
We first find the interest rate on the bank loan. The interest rate can be found using the compound interest formula - ...
The solution explains how to calculate the interest rate on financing options