Lyon\'s Furniture is advertising a \"Ho! Ho! Hold the Payments for 2 Full Years!
ID: 2650412 • Letter: L
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 14% 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
Answer:
Lets say the receivable are $100 to be received after 2 years
Now we calculate the present value of amount using the formula :
Present value = Future value / (1+r)^n
Future value = $100
r= rate of interest = 14% =0.14
n= Number of years = 2
Present value of $ 100 Shall be = $100 / (1+0.14)^2
= 100 /1.2996
=$76.95
Hence percentage of the purchase price that should be advance = 76.95 /100 =76.95%
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