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Dollar amount of acceptable accounts receivable collateral

1) Springer Products wishes to borrow $80,000 from a local bank using its accounts receivable to secure the loan. The banks policy is to accept as collateral any accounts that are normally paid within 30 days of the end of the credit period, as long as the average age of the account is not greater than the customers average payment period. Springers accounts
receivable, their average ages, and the average payment period for each customerare shown in the following table. The company extends terms of net 30 days.

Customer/ Account Rec/ average age of acct/ average pymt period of customer

A $20,000 10 days 40 days
B 6,000 40 35
C 22,000 62 50
D 11,000 68 65
E 2,000 14 30
F 12,000 38 50
G 27,000 55 60
H 19,000 20 35

a. Calculate the dollar amount of acceptable accounts receivable collateral held
by Springer Products.
b. The bank reduces collateral by 10% for returns and allowances. What is the
level of acceptable collateral under this condition?
c. The bank will advance 75% against the firms acceptable collateral (after
adjusting for returns and allowances). What amount can Springer borrow
against these accounts?

2) Raymond Manufacturing faces a liquidity crisisâ?"it needs a
loan of $100,000 for 1 month. Having no source of additional unsecured borrowing,
the firm must find a secured short-term lender. The firm's accounts receivable
are quite low, but its inventory is considered liquid and reasonably good
collateral. The book value of the inventory is $300,000, of which $120,000 is finished
goods. (Note: Assume a 365-day year.)

(1) City-Wide Bank will make a $100,000 trust receipt loan against the finished
goods inventory. The annual interest rate on the loan is 12% on the outstanding
loan balance plus a 0.25% administration fee levied against the $100,000 initial
loan amount. Because it will be liquidated as inventory is sold, the average
amount owed over the month is expected to be $75,000.

(2) Sun State Bank will lend $100,000 against a floating lien on the book value of
inventory for the 1-month period at an annual interest rate of 13%.

(3) Citizens' Bank and Trust will lend $100,000 against a warehouse receipt on the
finished goods inventory and charge 15% annual interest on the outstanding
loan balance. A 0.5% warehousing fee will be levied against the average amount
borrowed. Because the loan will be liquidated as inventory is sold, the average
loan balance is expected to be $60,000.

a. Calculate the dollar cost of each of the proposed plans for obtaining an initial loan
amount of $100,000.

b. Which plan do you recommend? Why?

c. If the firm had made a purchase of $100,000 for which it had been given terms of
2/10 net 30, would it increase the firm's profitability to give up the discount and
not borrow as recommended in part b? Why or why not?

Solution Preview

Hi: Please find the file attached. Thanks

Corporate Finance
1) Springer Products wishes to borrow $80,000 from a local bank using its accounts receivable to secure the loan. The banks policy is to accept as collateral any accounts that are normally paid within 30 days of the end of the credit period, as long as the average age of the account is not greater than the customers average payment period. Springers accounts receivable, their average ages, and the average payment period for each customer are shown in the following table. The company extends terms of net 30 days.

Customer Account Rec average age of acct average payment period of customer
A $20,000 10 days 40 days
B 6,000 40 35
C 22,000 62 50
D 11,000 68 65
E 2,000 14 30
F 12,000 38 50
G 27,000 55 60
H 19,000 20 35

a. Calculate the dollar amount of acceptable accounts receivable collateral held by Springer Products.
Customer Account Rec average age of acct average payment Comment
period of customer
A ...

Solution Summary

Solves two problems on working capital management

$2.19