Reference no: EM132736004

You are a senior financial analyst at Hospital ABC. In light of the growing working capital needs of Hospital ABC, and delayed reimbursements by many insurers which have led to cash flow shortages, the Finance Department was granted approval by the hospital board to pledge a certain amount of accounts receivable (A/R) as loan collateral.

• You have been assigned by the CFO (as head of the Finance Department) to study and compare the loan-to-value (LTV) method and borrowing base (BB) method based on a total portfolio of $1,000,000 in A/R that Hospital ABC has agreed to pledged. Hospital ABC wants to borrow exactly $700,000. Hospital ABC needs your advice as to whether it should pledge its A/R to creditor MNO (which uses the LTV) or to creditor XYZ (which uses the BB method).

Problem a: Calculate the maximum amount of loan that Hospital ABC can actually borrow from either creditor based on the following credit terms and conditions:

1. Creditor MNO (LTV method)

Hospital ABC's gross A/R portfolio: $1,000,000
Eligible A/R portfolio (as determined by MNO) $ 900.000
Hospital ABC's target loan amount: $ 700,000
Approved ratio by Creditor MNO: ≤ 0.80 LTV
Interest rate (prime+): 8.0 percent

2. Creditor XYZ (BB method)

Hospital ABC's gross A/R portfolio: $1,000,000
Ineligible A/R (due to aging determined by XYZ): $ 150,000
Hospital ABC's target loan amount: $ 700,000
Borrowing base percentage (approved by XYZ): 0.80
Reserves to be set aside by XYZ $ 22,500
Interest rate (prime+): 8.0 percent