Richenstein Enterprises is in the business of selling dishwashers. The firm needs $192,000 to finance an anticipated expansion in receivables due to increased sales. Richenstein's credit terms are net 40, and its average monthly credit sales are $180,000. In general, the firm's customers pay within the credit period; thus, the firm's average accounts receivable balance is $240,000.
The comptroller of Richenstein Enterprises, Mr. Gee, approached their bank for the needed capital, pledging the accounts receivable as collateral. The bank offered to make the loan at a rate of 2 percent over prime plus a 1 percent processing charge on all receivables pledged. The bank agreed to loan up to 80 percent of the face value of the receivables pledged.
| a. | Estimate the cost of the receivables loan to Richenstein where the firm borrows the $192,000. |
The prime rate is currently 13%.
| b. | Gee also requested a line of credit for $192,000 from the bank. The bank agreed to grant the |
necessary line of credit at a rate of 4% over prime and required a 12% compensating balance Gee currently maintains an average demand deposit of $40,000. Estimate the cost of the line of credit to Richenstein.
| c. | Which source of credit should Richenstein Enterprises select? |
Business Math Question Solution
When operating your own business, it is wise to know your cost of capital and that of the ...
When operating your own business, it is wise to know your cost of capital and that of the ...
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