CS Professional · Strategic Management and Corporate Finance · Raising of Funds - Non Fund Based
Ganga Textiles has a bank guarantee of ₹60,00,000 issued in favour of a supplier, with the bank holding a 25% cash margin. Commission is 2% per annum on the guaranteed amount. The bank pays 5% per annum interest on the margin deposit, while Ganga's alternative use of funds earns 11% per annum. Ignoring tax, what is the net annual cost to Ganga (commission plus opportunity cost of margin net of interest earned)?
The net annual cost is ₹2,10,000. Commission of 2% on ₹60 lakh is ₹1,20,000, and the ₹15 lakh margin costs the 6% gap between 11% opportunity return and 5% interest, which is ₹90,000.
- A₹1,20,000
- B₹1,90,000
- C₹2,10,000Correct
- D₹2,40,000
Explanation
Commission = 60,00,000 × 2% = ₹1,20,000. Margin = 25% × 60,00,000 = ₹15,00,000. Net opportunity cost = 15,00,000 × (11% − 5%) = ₹90,000. Total = ₹2,10,000. ₹1,90,000 would arise from wrongly using different margin figures, and ₹1,20,000 ignores the margin cost.
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