Problem 3 - The Barnes Corp. The Barnes Corporation has just acquired a large account. As a result, it needs an additional $75,000 in working capital immediately. It has been determined that there are three feasible sources of funds: a. Trade Credit: the company buys about $50,000 of materials per month on terms 3/30, net 90. Discounts are taken. b. Bank Loan: the firm's bank will lend $100,000 at 13%. A 10% compensating balance will be required, which otherwise would not be maintained by the company. c. A factor will buy the company's receivables ($100,000 per month), which have a collection period of 60 days. The factor will advance up to 75% of the face value of the receivables at 12% on annual basis. The factor will also charge a 2% fee on all receivables purchased. It has been estimated that the factor's services will save the company a credit department expense and bad debt expense of $1,500 per month. On the basis of annual percentage cost, which alternative should be selected?
Problem 3 - The Barnes Corp. The Barnes Corporation has just acquired a large account. As a result, it needs an additional $75,000 in working capital immediately. It has been determined that there are three feasible sources of funds: a. Trade Credit: the company buys about $50,000 of materials per month on terms 3/30, net 90. Discounts are taken. b. Bank Loan: the firm's bank will lend $100,000 at 13%. A 10% compensating balance will be required, which otherwise would not be maintained by the company. c. A factor will buy the company's receivables ($100,000 per month), which have a collection period of 60 days. The factor will advance up to 75% of the face value of the receivables at 12% on annual basis. The factor will also charge a 2% fee on all receivables purchased. It has been estimated that the factor's services will save the company a credit department expense and bad debt expense of $1,500 per month. On the basis of annual percentage cost, which alternative should be selected?
Chapter17: The Management Of Cash And Marketable Securities
Section: Chapter Questions
Problem 2P
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Question
Transcribed Image Text:Problem 3 - The Barnes Corp.
The Barnes Corporation has just acquired a large account. As a result, it
needs an additional $75,000 in working capital immediately. It has been
determined that there are three feasible sources of funds:
a. Trade Credit: the company buys about $50,000 of materials per month on
terms 3/30, net 90. Discounts are taken.
b. Bank Loan: the firm's bank will lend $100,000 at 13%. A 10%
compensating balance will be required, which otherwise would not be
maintained by the company.
c. A factor will buy the company's receivables ($100,000 per month), which
have a collection period of 60 days. The factor will advance up to 75% of
the face value of the receivables at 12% on annual basis. The factor will
also charge a 2% fee on all receivables purchased. It has been estimated
that the factor's services will save the company a credit department
expense and bad debt expense of $1,500 per month.
On the basis of annual percentage cost, which alternative should be selected?
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