Estimate the cost of the receiveables loan to johnson

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Johnson Enterprises Inc is involved in the manufacture and sale of electronic components use in small Am/FM radios. The firm needs $300,000 to finance an anticipated expansion in receiveables due to increased sales. Johnson's credit terms are net 60, and its average monthly credit sales are $200.000. In general, the firm's customers pay within the credit period; thus, the firm's average accounts receivables balance is $400,000. Chuck Idol, Johnson's comptroller, approached the firm's bank with a request for a loan for the $300,000 using the firm's account's receiveables as collateral. The bank offered to make a loan at a rate of 2 percent over prime plus a 1 percent processing charge on all receivables pledged($200,000 per month). Furthermore, the bank agreed to lend up to 75 percent of the face value of the receiveables pledged.

a. Estimate the cost of the receiveables loan to Johnson when the firm borrows the $300k. The prime rate is 11%.

b. Idol also requested a line of credit for $300k from the bank. The bank agreed to grant the necessary line of credit at a rate of 3%over prime and required 15% compensating balance. Johnson currently maintains an average demand deposit of $80k. Estime the cost of the line of credit to Johnson.

c. Which source of credit should Johnson select, Why?

 

Reference no: EM13298305

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