Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Something Wrong Limited (SWL) plans to identify the best options among two possible alternatives to finance its working capital based on an effective annualized rate

Something Wrong Limited (SWL) plans to identify the best options among two possible alternatives to finance its working capital based on an effective annualized rate (EAR). The first option relates to financing via an unsecured bank loan agreement. The company can borrow $4,000,000 from Always Misleading Clients (AMC) bank for four months with 8% compensating balances and a 10% yearly interest basis with a discount option. AMC will charge a 3% commitment fee on the unused part of the loan. Historically SWL borrows 90% of the usable fund. The alterntive option relates to factoring its account receivables. SWL Limited generates annual credit sales of $16 million, with an average collection period is four months. Historically, 97% of SWLs credit sales are good and collectible. SWL is considering factoring its A/R balances with AMC at a 10% annual interest rate and 6% reserve requirement. AMC charges a factoring commission of 2.5%. The operating cost of the credit administration department per collection cycle is $8000, while the cost for collection is 2.1% on credit sales.

a. Determine the EAR of unsecured bank loan agreement and factoring account receivables.

b. Which option should SWL choose?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Globalization Gating And Risk Finance

Authors: Unurjargal Nyambuu, Charles S. Tapiero

1st Edition

1119252652, 978-1119252658

More Books

Students also viewed these Finance questions

Question

1.Which are projected Teaching aids in advance learning system?

Answered: 1 week ago

Question

What are the classifications of Bank?

Answered: 1 week ago