Question

A rapidly growing small firm does not have access to sufficient external financing to accommodate its planned growth. Discuss what alternatives the company can consider in order to implement its growth strategy. How can the firm determine the cost of those alternative sources of capital?

Answer 1

Answer:

Alternatives :

1. Bank Overdraft facility

2.Suppliers Credit

Cost determination :

1. Bank Overdraft facility = Interest rate charged on the facility by the bank

2.Suppliers Credit = Opportunity cost of losing the early settlement discount.

Explanation:

If the company can not access sufficient external financing, consider internal sources such as bank overdraft or suppliers credit.

The cost of bank overdraft is evaluated based on the interest rate charged by the bank whilst the cost of the suppliers credit is determined by considering the opportunity cost of losing the cash discount available.