vvk.1 LoDo Tiles Inc. is considering factoring its receivables. The company's average collection period is 55 days, and its average level of receivables is $750,000. The factor has indicated that it requires a 15% reserve for returns andallowances, and charges a 2.5% factoring commission, with the commission to be paid up front. The factor will advance LoDo Tiles funds at 2.0 percentage points over the prime lending rate, which is currently 5.0 %. Interest is to be paidup front. Determine the effective annual rate of the factoring. Assume 365 days in a year 26.8% 30.8% 25.6 % 33.4%

Accounts receivables:The accounts receivables refer to the account that is open when the sales are…

Answered: LoDo Tiles Inc. is considering…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 33P

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Zerox Copying Company plans to borrow $174,000. New Jersey National Bank will lend the money at one-half percentage point over the prime rate at the time of 12.50 percent (13 percent total) and requires a compensating balance of 24 percent. The principal in this case will be funds that the firm can effectively use in the business. This loan is for one year. a. What is the effective rate of interest? (Input your answer as a percent rounded to 2 decimal places. Use a 360-day year.) b. What would the effective rate be if Zerox were required to make four quarterly payments to retire the loan? (Input your answer as a percent rounded to 2 decimal places.)
Ranger Enterprises is considering pledging its receivables to finance a needed increase in working capital. Its commercial bank will lend 65 percent of the pledged receivables at 1.5 percentage points above the prime rate, which is currently 9 percent. In addition, the bank charges a service fee equal to 2 percent of the pledged receivables. Both interest and the service fee are payable at the end of the borrowing period. Ranger’s average collection period is 50 days, and it has receivables totaling $6 million that the bank has indicated are acceptable as collateral. Calculate the annual financing cost for the pledged receivables. Assume that there are 365 days per year. Round your answer to two decimal places. %
Resty Corporation needs P400,000 additional financing. The company is considering the choice of financing with a bank or a factor. The bank loan carries a 20 percent interest rate on a discount basis with a required compensating balance of 16 percent. The factor charges a 3 percent commission on invoices purchased monthly. The interest rate associated with these invoices is 11 percent with interest deductible in advance. If a factor is used, there will be a monthly savings of P1,500 per month in credit department costs. Further, the expense of an uncollectible account of 2 percent on the factored receivables will not exist. (A) What amount of principal must the company borrow from the bank to receive P400,000 in proceeds? (B) What amount of accounts receivable must be factored to net the firm P400,000? choose the bullet with the correct answer (A) P325,000.00 and (B) P265,116.00 (A) P525,000.00 and (B) P465,116.00 (A) P525,000.00 and (B) P265,116.00 (A) P625,000.00 and (B)…
Melody Dairy has a line of credit with its bank. The firm plans to borrow $400,000 at a rate of 10 percent. The bank requires a 15% compensating balance and the firm currently maintains $20,000 in its account at the bank that can be used to meet the compensating balance requirement. Determine the annual finance cost to Melody of this loan.
Maximum Bank has analyzed the accounts receivable of Scientific Software, Inc. The bank has chosen eight accounts totaling $134,000 that it will accept as collateral. The bank’s terms include a lending rate set at prime plus 3% and a 2% commission charge. The prime rate currently is 8.5%. The bank will adjust the accounts by 10% for returns and allowances. It then will lend up to 85% of the adjusted acceptable collateral. What is the maximum amount that the bank will lend to Scientific Software? What is Scientific Software’s effective annual rate of interest if it borrows $100,000 for 12 months? For 6 months? For 3 months? (Note: Assume a 365-day year and a prime rate that remains at 8.5% during the life of the loan.)
(Cost of factoring) MDM Inc. is considering factoring its receivables. The firm has credit sales of $300,000 per month and has an average receivables balance of $600,000 with 60-day credit terms. The factor has offered to extend credit equal to 89 percent of the receivables factored less interest on the loan at a rate of 1.3 percent per month. The 11 percent difference in the advance and the face value of all receivables factored consists of a 2 percent factoring fee plus a 9 percent reserve, which the factor maintains. In addition, if MDM Inc. decides to factor its receivables, it will sell them all, so that it can reduce its credit department costs by $1,200 a month. a. What is the cost of borrowing the maximum amount of credit available to MDM Inc. through the factoring agreement? Note: Assume a 30-day month and 360-day year. b. What considerations other than cost should MDM Inc. account for in determining whether to enter the factoring agreement? The cost of borrowing the maximum…
Racman, Inc. needs P2,000,000 to finance its extension program. Racman, Inc. is negotiating a loan with Metropolis Bank which requires the company to maintain a compensating balance of 10% of the loan principal on deposit in a current account at the bank. Pierce, Inc. currently maintains a balance of P20,000 in its current account. The current account earns interest of 2% per annum. The interest rate on the loan is 12% per annum. 1. What is the effective interest rate on the loan?
Union Trust Commercial Bank has issued a one-year $100 million loan commitment to a customer for an up-front fee of 25 basis points. In the analysis to compute its loan rate for this customer, the bank has determined that its base lending rate will be 10% and its margin to compensate the bank for default risk for this particular customer is 2%. The back-end fee for non-usage of the commitment is 10 basis points. The bank requires a 5 percent compensating balance in demand deposits on the entire amount of the commitment. The reserve requirement ratio on demand deposits at the central bank is 10 percent. What is the loan rate offered to this customer? What is effective return on the loan to the bank if 50 percent of the loan is taken down? In computing this return, do not take into consideration future values of fee or interest income received.
Axis Wells and Excavation (AWE) currently generates $110,000 in annual credit sales. AWE sells on terms of net 50, and its accounts receivable balance averages $11,000. AWE is considering a new credit policy with terms of net 25. Under the new policy, sales will decrease to $104,000, and accounts receivable will average $13,000. Compute the days sales outstanding (DSO) under the existing policy and the proposed policy. Assume there are 360 days in a year. Round your answers to the nearest whole number. DSO Existing: days DSO New: days
Maris Bank has analyzed the accounts receivable of Anthony Software, Inc. The bank has chosen eight accounts totaling $134,000 that it will accept as collateral. The bank’s terms include a lending rate set at prime 3% and a 2% commission charge. The prime rate currently is 8.5%. Show Solutions and Explanation. A. The bank will adjust the accounts by 10% for returns and allowances. It then will lend up to 85% of the adjusted acceptable collateral. What is the maximum amount that the bank will lend to Anthony Software? (Format: 111,111) B. What is Anthony Software’s effective annual rate of interest if it borrows $100,000 for 12 months? (Note: Assume a 365-day year and a prime rate that remains at 8.5% during the life of the loan.) (Format: 11.1%)
Maximum Bank has analyzed the accounts receivable of Scientific Software, Inc. The bank has chosen eight accounts totaling $134,000 that it will accept as collateral. The bank’s terms include a lending rate set at prime 3% and a 2% commission charge. The prime rate currently is 8.5%. 1.The bank will adjust the accounts by 10% for returns and allowances. It then will lend up to 85% of the adjusted acceptable collateral. What is the maximum amount that the bank will lend to Scientific Software? Format: 111,111 2.What is Scientific Software’s effective annual rate of interest if it borrows $100,000 for 12 months? (Note: Assume a 365- day year and a prime rate that remains at 8.5% during the life of the loan.) Format: 11.1%
Axis Wells and Excavation (AWE) currently generates $198,000 in annual credit sales. AWE sells on terms of net 50, and its accounts receivable balance averages $11,000. AWE is considering a new credit policy with terms of net 25. Under the new policy, sales will decrease to $189,000, and accounts receivable will average $12,600. Compute the days sales outstanding (DSO) under the existing policy and the proposed policy. Assume there are 360 days in a year. Round your answers to the nearest whole number. DSOExisting: days DSONew: days

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