Question
Mercury Inc. is currently in need of $100,000 to support its short-term financing (3 months period). It is considering two options as follows: 1. Factoring
Mercury Inc. is currently in need of $100,000 to support its short-term financing (3 months period). It is considering two options as follows:
1. Factoring its accounts receivable that carries 90-day credit terms. The factors fee is 3% and requires a 5% reserve. Interest is at 0.5% per month on the advance.
a. How much accounts receivable should Mercury factor? (Round it to the nearest thousands).
b. Calculate the cost of credit under this option.
2. Line of credit from Mars Bank. Mars requires a compensating balance of 10% of the loan amount. The interest on the loan is 8% per year and the bank loan is made on a discount basis (the loan interest is deducted from the loan amount before the funds are transferred to Mercury). Determine the effective rate of interest under this alternative. (Round the loan to the nearest thousands).
3. Which alternative would you recommend to Mercury? Explain your answer.
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