Concept explainers
(Cost of accounts receivable) The Michelin Warehousing and Transportation Company (WTC) needs $300,000 to finance an anticipated expansion in receivables due to increased sales. WTC’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, WTC’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 WTC when the firm borrows the $300,000. The prime rate is currently 5 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. WTC currently maintains an average demand deposit of $20,000. Estimate the cost of the line of credit to WTC.
- c. Which source of credit should the firm select? Why?

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Chapter 15 Solutions
Pearson Etext For Foundations Of Finance -- Combo Access Card (10th Edition)
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning

