Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 15, Problem 14SP
(Cost of factoring) MDM, Inc. is considering factoring its receivables. The firm has credit sales of $400,000 per month and has an average receivables balance of $800,000 with 60-day credit terms.
The factor has offered to extend credit equal to 90 percent of the receivables factored less interest on the loan at the rate of 1.5 percent per month. The 10 percent difference in the advance and the face value of all receivables factored consists of a 1 percent factoring fee plus a 9 percent reserve, which the factor maintains. In addition, if MDM, Inc. decides to factor its receivables, it will sell them all so that it can reduce its credit department costs by $1,500 a month.
- a. What is the cost of borrowing the maximum amount of credit available to MDM, Inc. through the factoring agreement?
- b. What considerations other than cost should MDM, Inc. account for in determining whether to enter the factoring agreement?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
ABC is deciding if credit should be extended to its customers. It has determined that there is a 95% probability that it would collect the full payment from a credit sale in one month. The receivable is financed at an APR of 7.10%. On credit sales of $3,000 per unit, the present value of costs are expected to be 84.50% of the sales price. What is the present value of the expected profit on the sale of each unit?
Explain with all steps
a.-$16.76
b.-$166.76
c.$126.06
d.$254.90
e.$298.24
(Cost of factoring) MDM Inc. is considering factoring its receivables. The firm has credit sales of $300,000 per month and has an average
receivables balance of $600,000 with 60-day credit terms.
The factor has offered to extend credit equal to 89 percent of the receivables factored less interest on the loan at a rate of 1.3 percent per month.
The 11 percent difference in the advance and the face value of all receivables factored consists of a 2 percent factoring fee plus a 9 percent
reserve, which the factor maintains. In addition, if MDM Inc. decides to factor its receivables, it will sell them all, so that it can reduce its credit
department costs by $1,200 a month.
a. What is the cost of borrowing the maximum amount of credit available to MDM Inc. through the factoring agreement? Note: Assume a 30-day
month and 360-day year.
b. What considerations other than cost should MDM Inc. account for in determining whether to enter the factoring agreement?
The cost of borrowing the maximum…
Dome Metals has credit sales of $162,000 yearly with credit terms of net 30 days, which is also the average collection period. a. Assume the firm offers a 2 percent discount for payment in 15 days and every customer takes advantage of the discount. Also assume the firm uses the cash generated from its reduced receivables to reduce its bank loans which cost 8 percent. What will the net gain or loss be to the firm if this discount is offered? (Use a 360-day year.)
Loss of: $_________
Chapter 15 Solutions
Foundations Of Finance
Ch. 15 - Dell Computer Corporation (DELL) has long been...Ch. 15 - Prob. 2RQCh. 15 - Prob. 3RQCh. 15 - Prob. 4RQCh. 15 - Explain what is meant by the statement The use of...Ch. 15 - Prob. 6RQCh. 15 - Prob. 7RQCh. 15 - How can the formula interest = principle rate ...Ch. 15 - How can we accommodate the effects of compounding...Ch. 15 - Prob. 10RQ
Ch. 15 - Prob. 11RQCh. 15 - Prob. 12RQCh. 15 - Prob. 1SPCh. 15 - Prob. 2SPCh. 15 - Prob. 3SPCh. 15 - (Estimating the cost of bank credit) Paymaster...Ch. 15 - (Cost of short-term financing) The R. Morin...Ch. 15 - (Cost of secured short-term credit) The Marlow...Ch. 15 - (Cost of short-term financing) You plan to borrow...Ch. 15 - Prob. 8SPCh. 15 - (Cost of trade credit) Calculate the effective...Ch. 15 - (Annual percentage yield) Compute the cost of the...Ch. 15 - Prob. 11SPCh. 15 - (Cost of accounts receivable) The Michelin...Ch. 15 - (Cost of accounts receivable) The Michelin...Ch. 15 - (Cost of factoring) MDM, Inc. is considering...Ch. 15 - (Cost of factoring) A factor has agreed to lend...Ch. 15 - Prob. 16SPCh. 15 - Prob. 17SP
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Zerox Copying Company plans to borrow $174,000. New Jersey National Bank will lend the money at one-half percentage point over the prime rate at the time of 12.50 percent (13 percent total) and requires a compensating balance of 24 percent. The principal in this case will be funds that the firm can effectively use in the business. This loan is for one year. a. What is the effective rate of interest? (Input your answer as a percent rounded to 2 decimal places. Use a 360-day year.) b. What would the effective rate be if Zerox were required to make four quarterly payments to retire the loan? (Input your answer as a percent rounded to 2 decimal places.)arrow_forwardHAPPY Company makes credit sales of P1,800,000 annually. The average age of accounts receivable is 30 days. Management consider shortening credit terms to 20 days. Cost of money is 12%. How much will the company save from financing charges? Use 360-day year MY ANSWER IS 6,000 AND 12,000. WHAT IS THE CORRECT ANSWER?arrow_forwardDome Metals has credit sales of $468,000 yearly with credit terms of net 60 days, which is also the average collection period. a. Assume the firm offers a 3 percent discount for payment in 10 days and every customer takes advantage of the discount. Also assume the firm uses the cash generated from its reduced receivables to reduce its bank loans which cost 8 percent. What will the net gain or loss be to the firm if this discount is offered? (Use a 360-day year.) Net change in income b. Should the firm offer the discount? O No Yesarrow_forward
- Dome Metals has credit sales of $198,000 yearly with credit terms of net 120 days, which is also the average collection period. Assume the firm adopts new credit terms of 4/10, net 120 and all customers pay on the last day of the discount period. Any reduction in accounts receivable will be used to reduce the firm's bank loan which costs 8 percent. The new credit terms will increase sales by 20% because the 4% discount will make the firm's price competitive. a. If Dome earns 25 percent on sales before discounts, what will be the net change in income if the new credit terms are adopted? (Use a 360-day year.) Net change in income b. Should the firm offer the discount? No Yesarrow_forwardVan Buren Resources Inc. is considering borrowing $90,000 for 175 days from its bank. Van Buren will pay $3,000 of interest at maturity, and it will repay the $90,000 of principal at maturity. Assume that there are 365 days per year. Calculate the loan’s annual financing cost. Round your answer to two decimal places. % Calculate the loan’s annual percentage rate. Round your answer to two decimal places. % What is the reason for the difference in your answers to Parts a and b? The does not consider compounding effects.arrow_forwardDome Metals has credit sales of $450,000 yeariy with credit terms of net 45 days, which is also the average collection perlod. a. Assume the fnrm offers a 2 percent discount for payment in 18 days and every customer takes advantage of the discount. Also assume the firm uses the cash generated from its reduced receivables to reduce its bank loans which cost 12 percent. What will the net gain or loss be to the firm if this discount is offered? (Use a 360-day year.)arrow_forward
- JOKER Company makes credit sales of P1,800,000 annually. The average age of accounts receivable is 30 days. Management consider shortening credit terms to 20 days. Cost of money is 12%. How much will the company save from financing charges? Use 360-day yeararrow_forwardAxis Wells and Excavation (AWE) currently generates $110,000 in annual credit sales. AWE sells on terms of net 50, and its accounts receivable balance averages $11,000. AWE is considering a new credit policy with terms of net 25. Under the new policy, sales will decrease to $104,000, and accounts receivable will average $13,000. Compute the days sales outstanding (DSO) under the existing policy and the proposed policy. Assume there are 360 days in a year. Round your answers to the nearest whole number. DSO Existing: days DSO New: daysarrow_forwardA company can issue a 45-day $10 million commercial paper at a rate of 4.50%. It can reduce the rate to 4.35% if it is backed by a standby letter of credit (SBLC). A bank is willing to issue the SBLC for a fee of 10 basis points. The following is true: A The fee for issuing the SBLC is $10,000 B The net savings to the issuer is $1,250 C The amount received by the issuer for the commercial paper without an SBLC is $9,945,625. D The difference in the amount received by the issuer with and without the SBLC is $1,875.arrow_forward
- Taylor Company provides the following information: Annual credit sales : $ 24,000,000Collection period : 3 monthsTerms : net/30Rate of return : 18% The company is considering changing the credit discount policy to 4/10, net 30. The company anticipates that thirty percent of consumers will take the discount. The receivable collection period is expected to be reduced to 2 months. Should the discount policy be implemented? Explain with calculations.arrow_forwardWontaby Ltd. is extending its credit terms from 30 to 45 days. Sales are expected to increase from $4.90 million to $6.00 million as a result. Wontaby finances short-term assets at the bank at a cost of 10 percent annually. Calculate the additional annual financing cost of this change in credit terms. (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to the nearest whole dollar. Enter answer in whole dollar not in million.) Annual financing cost $arrow_forwardCompany XYZ has annual credit sales of $2,500,000. Collection of the credit sales are evenly spread out over the 250 working days per year. The company’s annual cost of borrowing is 7%. How much would XYZ save each year by improving its receivables process by one day?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Cost-Volume-Profit (CVP) Analysis and Break-Even Analysis Step-by-Step, by Mike Werner; Author: Accounting Step by Step;https://www.youtube.com/watch?v=D0MOfse9OWk;License: Standard Youtube License