Ace’s Business Forms pays 8 percent on short-term funds and 10 percent

Ace’s Business Forms pays 8 percent on short-term funds and 10 percent on long-term funds.

Determine its annual financing costs using the trade-off strategy described: Ace’s Business Forms has seasonal financing requirements ranging from zero to $50,000 per month. Based on this range, the firm has decided to finance $25,000 per month of the seasonal funds with long-term debt and the rest of the seasonal funds with short-term debt. The permanent funds requirement will be financed with long-term funds. (See Table 14.3 )

ANSWER

Trade-off strategy annual financing costs:
($350,000 + $25,000 ) × (0.10 ) = $37,500
$37,500