1.Example 15.3 (EPG Manuf. Co) Commercial papers change to 12% to 9%

Calculating the Effective Cost of Credit

The EPG Manufacturing Companyuses commercial paper regularly to support its needs for short-term financing. The firm plans to sell $100 million in 270-day-maturity paper, on which it expects to pay discounted interest at a rate of 12 percent per annum ($9 million). In addition, EPG expects to incur a cost of approximately $100,000 in dealer placement feesand other expenses of issuing the paper. What is the effective cost of credit to EPG?

2.Example 15.4 (AB Good Co) Pledging A/R change prime from 10% to 6%

Calculating the Annual Percentage Rate of Short-Term Lender Credit

The A. B. Good Company sells electrical supplies to building contractorson terms of net 60. The firm's average monthly sales are $100,000; thus, given the firm's 2-month credit terms, its average receivable balanceis $200,000. The firm pledges all of its receivables to a local bank, which in turn advances up to 70 percent of the face value of the receivables at 3 percent over prime and charges a 1 percent processing fee on all receivables pledged. A. B. Good follows a practice of borrowing the maximum amount possible, and the current prime rate is 10 percent. What is the APR of using this source of financing for a full year?

3.Factoring. Change fee to 4%

Ex. If $100,000 in receivables is factored, carrying 60-day credit terms, a 2 percent factor's fee, a 6 percent reserve, an interest at 1 percent per month on advances, then he maximum loan or advance the form can receive is computed a s follows:

Face amount of receivables :

$100,000

Less: Fee (0.04 x $100,000)

(4,000)

Reserve (0.06 x 100,000)

(6,000)

Interest (0.01 x $92,000 x 2 months)

(1,840)

Maximum advance

$88,160