Homework Clinic

Social Science Clinic => Business => Finance => Topic started by: kamilo84 on May 1, 2019

Title: MovieTone, Inc. is a producer and distributor of specialty DVDs. It sells directly to large retail ...
Post by: kamilo84 on May 1, 2019

MovieTone, Inc. is a producer and distributor of specialty DVDs. It sells directly to large retail firms on terms of net 60 and has average monthly sales of $350,000. It has recently decided to pledge all of its accounts receivable to its bank. The bank advances up to 80 percent of the face value of these receivables at a rate of 4 percent over the prime rate, while charging 2.5 percent on all receivables pledged for processing to cover billing and collection services. Prior to this arrangement MovieTone was spending $50,000 a year on its credit department. The prime rate is 6 percent.

a.	What is the average level of accounts receivable?

b.	What is the effective cost of using this short-term credit for one year?

Title: MovieTone, Inc. is a producer and distributor of specialty DVDs. It sells directly to large retail ...
Post by: polinasid on May 1, 2019

a.	2 × $350,000 = $700,000

b.	Rate = × = 0.1982

Annual interest expense = 0.10 × 0.80 × $700,000 = $56,000

Processing fee = .025 × $350,000 × 12 = $105,000