Analyze repayment methods

“Johnston contemplated financing $20 million of the purchase price with cash and financing the balance with bank debt. He estimated that up to $70 million could be borrowed at a nominal rate of 8 3/4% repayable over seven years semiannually, starting the following year. The company would be required to maintain an average compensating balance of 7% on the amount to be borrowed. Alternatively, the $70 million can be borrowed through three revolving 180-day short-term loans with average stated interest rate being 4.5%. ”
i discuss with my classmate, we will choose the $70 million can be borrowed through three revolving 180-day short-term loans with average stated interest rate being 4.5%. Only analysis is good do not need Calculation
You need to analyze the benefits and disadvantages of both methods.
Conclusion: Choose 180 days. Choose no mortgage because the cash flow will be higher that way.
The first method:borrowed at a nominal rate of 8 3/4% repayable over seven years semiannually, starting the following year. The company would be required to maintain an average compensating balance of 7% on the amount to be borrowed.
1: 75.2 have 7% money need toMortgage
95。2-20=75.2-6.5=68.7

Second method.the $70 million can be borrowed through three revolving 180-day short-term loans with average stated interest rate being 4.5%. ” Higher free cash flow Analyze its benefits
limit in 400 words

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