Lepreau Books Corporation has an agreement with Hampton Bank whereby the bank handles $5 million in collections

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Lepreau Books Corporation has an agreement with Hampton Bank whereby the bank handles $5 million in collections a day and requires a $350,000 compensating balance. Lepreau Books is contemplating cancelling the agreement and dividing its eastern region so that two other banks will handle its business. Banks A and B will each handle $2.5 million of collections a day, and each requires a compensating balance of $200,000. Lepreau Books’ financial management expects that collections will be accelerated by one day if the eastern region is divided. Should the company proceed with the new system? What will be the annual net savings? Assume that the T-bill rate is 2.5 percent annually.

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
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Fundamentals of Corporate Finance

ISBN: 978-0071051606

8th Canadian Edition

Authors: Stephen A. Ross, Randolph W. Westerfield

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