Lyon\'s Furniture is advertising a \"Ho! Ho! Hold the Payments for 2 Full Years!

Question

Lyon's Furniture is advertising a "Ho! Ho! Hold the Payments for 2 Full Years!" sale. Lyon's advance factors all of its receivables to Citibank. Citibank has credit checking terminals in all of the company's stores. Once a customer is approved, Citibank assumes the liability of collecting the receivable from the customer (in 2 years) and immediately advances Lyon's percentage of the sale price. If Citibank wants to earn 15% on invested funds to cover the cost of capital and default risk, then what percentage of the purchase price will it advance to Lyon's? (Round to 2 decimal places).

Explanation / Answer

Let Purchase price=100

And citi bank advances y% of Purchase price

Total amount advance=Y*X/100=Y*100/100=Y

For 15% return on invested fund

Since citi bank will be recovering amount X from the customer, the amount

100=Y(1.15^2)

Y=75.614367

Since citi bank will be advancing 75.61% of purchase piece to Lyon

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