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Unformatted text preview: , the firm funds both its seasonal and its
permanent requirements with long-term debt.
Semper Pump Company has a permanent funding requirement of $135,000 in
operating assets and seasonal funding requirements that vary between $0 and
$990,000 and average $101,250. If Semper can borrow short-term funds at
6.25% and long-term funds at 8%, and if it can earn 5% on the investment of
any surplus balances, then the annual cost of an aggressive strategy for seasonal
funding will be
Cost of short-term financing
Cost of long-term financing
Earnings on surplus balances4 0.0500
Total cost of aggressive strategy $101,250
0 $ 6,328.13
$17,128.13 Alternatively, Semper can choose a conservative strategy, under which surplus cash balances are fully invested. (In Figure 14.2, this surplus will be the difference between the peak need of $1,125,000 and the total need, which varies
between $135,000 and $1,125,000 during the year.) The cost of the conservative
strategy will be
Cost of short-term f...
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