Shamim Co. Ltd. needs a working capital of Tk. 5,00,000. There are three alternative methods of financing

Shamim Co. Ltd. needs a working capital of Tk. 5,00,000. There are three alternative methods of financing
i. To forgo cash discount granted on the basis of 3/10, net 60.

ii. The Co. has a revolving credit of Tk. 5,000,000 at an interest of 13% with Pubail Bank Ltd. its average borrowing was Tk. 3,00,000 for the year. A commitment fee of 2.5% is to be paid. Piii. The Co. issued a 120 days commercial paper of a face value of Tk. 5,00,000 and its sales value is Tk. 4,50,000. The credit rating expense is 0.5% of the size of the issue, agent charges being 0.25% and stamp duty 0.5%.

To choose the cheapest financing method for Shamim Co. Ltd., we calculate the effective annual cost (EAC) of each alternative.

Option i: Trade Credit (Forgo Cash Discount)

• Credit Terms:
• Discount Period:
• Net Credit Period:
• Credit Period Used (Borrowing Days):

Option ii: Revolving Credit Agreement

• Average Borrowed Amount: Tk. 3,00,000
• Interest Rate:
• Interest Paid:
• Commitment Fee Rate:

Note on Total Line: If the revolving credit line limit is Tk. 5,00,000 (matching the needed working capital limit), the unborrowed amount is .

(If evaluating strictly as written with a limit of Tk. 50,00,000, the unused line is Tk. 47,00,000).

Case A: Assuming Total Line Limit = Tk. 5,00,000

• Unused Amount:
• Commitment Fee:
• Total Cost:

Case B: Assuming Total Line Limit = Tk. 50,00,000 (As stated)

• Unused Amount:
• Commitment Fee:
• Total Cost:

Option iii: Commercial Paper

• Face Value: Tk. 5,00,000
• Sales Value: Tk. 4,50,000
• Dollar Discount:
• Maturity Period: 120 days

Additional Expenses (calculated on Face Value):

• Credit Rating Expense ():
• Agent Charges ():
• Stamp Duty ():
• Total Issue Expenses:

Net Proceeds & Total Cost:

• Total Cost for 120 Days:
• Net Proceeds:

Comparison Summary

Alternative	Financing Source	Effective Annual Cost
Option i	Trade Credit	22.27%
Option ii	Revolving Credit	14.67% (52.17% if limit is 50 Lac)
Option iii	Commercial Paper	38.03%

Final Recommendation & Decision:

The cheapest alternative is Option ii: Revolving Credit Agreement (assuming a standard Tk. 5,00,000 credit limit matching the needed capital), offering the lowest effective cost of 14.67%.

(If the revolving line limit is strictly Tk. 50,00,000 making commitment fees extremely high, then Option i: Trade Credit at 22.27% would be the cheapest available choice).

আর্টিকেলের শেষ কথাঃ Shamim Co. Ltd. needs a working capital of Tk. 5,00,000. There are three alternative methods of financing

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