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Sunny Coast Enterprises ( B ) . Sunny Coast Enterprises has sold a combination of films and DVDs to Hong Kong Media Incorporated for US
Sunny Coast Enterprises B Sunny Coast Enterprises has sold a combination of films and DVDs to Hong Kong Media Incorporated
for US $ with payment due in six months. Sunny Coast Enterprises has the following alternatives for financing this receivable:
Use its bank credit line. Interest would be at the prime rate of plus basis points per annum. Use its bank credit line but
purchase export credit insurance for a fee. Because of the reduced risk, the bank interest rate would be reduced to per annum
without any points. In both cases Sunny Coast would need to maintain a compensating balance of of the loan's face amount, and
no interest will be paid on the compensating balance by the bank. Sunny Coast Enterprises has been approached by a factor that
offers to purchase the Hong Kong Media Imports receivable at a per annum discount plus a charge for a nonrecourse
clause.
a What are the annualized percentage allin costs of each alternative?
b What are the advantages and disadvantages of the factoring alternative compared to the alternatives and
NOTE: Assume a day year.
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