Johnson Enterprises Inc. is involved in the manufacture and sale of electronic c

Question

Johnson Enterprises Inc. is involved in the manufacture and sale of electronic components used in small AM/FM radios. The firm needs $300,000 to finance an anticipated expansion in receivables 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 receivable 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 accounts receivable 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 receivables pledged.
• a. Estimate the cost of the receivables loan to Johnson when the firm borrows the $300,000. The prime rate is currently 11 percent.
• b. Idol also requested a line of credit for $300,000 from the bank. The bank agreed to grant the necessary line of credit at a rate of 3 percent over prime and required a 15 percent compensating balance. Johnson currently maintains an average demand deposit of $80,000. Estimate the cost of the line of credit to Johnson.
• c. Which source of credit should Johnson select? Why?

Explanation / Answer

400000 X 13% X .75= 39000

= 200000 X 1% X 12= 24000

APR= 39000 +24000/300000   X 1/(360/360) = .21 =21%

-------------------------

42000/ 300000 X 1/(360/360) = 0.14=14%

=300000 X14% = 42000

-----------------------------

CHOOSE EFFECTIVE INTEREST RATE –LOWER

Related Questions

Navigate

• Browse (All)
• Browse J
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.