Calculate cost of the receivables loan to Raya Enterprise

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Reference no: EM132823841

Question - Raya Enterprises is in the business of selling dishwashers. The firm needs $192,000.00 to finance an anticipated expansion in receivables due to increased sales. Raya's credit terms are net 40, and its average monthly credit sales are $180,000.00. In general, the firm's customers pay within the credit period; thus, the firm's average accounts receivable balance is $240,000.00.

The finance manager of Raya Enterprises, Mr. Lee, approached their bank for the needed capital, pledging the accounts receivable as collateral. The bank offered to make the loan at a rate of 2 percent over prime plus a 1 percent processing charge on all receivables pledged. The bank agreed to loan up to 80 percent of the face value of the receivables pledged.

(i) Calculate the cost of the receivables loan to Raya Enterprise where the firm borrows the $192,000.00. The prime rate is currently 13%.

(ii) Mr Lee also requested a line of credit for $192,000.00 from the bank. The bank agreed to grant the necessary line of credit at a rate of 4% over prime and required a 12% compensating balance. The company currently maintains an average demand deposit of $40,000.00. Estimate the cost of the line of credit to Raya.

(iii) Which source of credit should Raya Enterprises select and why?

Reference no: EM132823841

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