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Unformatted text preview: inancing
Cost of long-term financing
Earnings on surplus balances5 0.0500
Total cost of conservative strategy $
888,750 $ 0
$45,562.50 It is clear from these calculations that for Semper, the aggressive strategy is far
less expensive than the conservative strategy. However, it is equally clear that
Semper has substantial peak-season operating-asset needs and that it must have
adequate funding available to meet the peak needs and ensure ongoing operations.
Clearly, the aggressive strategy’s heavy reliance on short-term financing
makes it riskier than the conservative strategy because of interest rate swings and
possible difficulties in obtaining needed short-term financing quickly when sea- 4. Because under this strategy the amount of financing exactly equals the estimated funding need, no surplus balances exist.
5. The average surplus balance would be calculated by subtracting the sum of the permanent need ($135,000) and
the average seasonal need ($101,250) from th...
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