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, placing the accounts receivable as collateral. The bank offered to make the loan at a rate of 2% over prime plus a 1% processing charge on all receivables pledged. The bank agreed to loan up to 80% 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?
Please see the attached file for calculations
a. Estimate the cost of the receivables loan to Richenstein where the firm borrows the $192,000.The prime rate is ...
The solution explains how to calculate the cost of two sources of credit and which to choose