(Cost of factoring) MDM Inc. is considering factoring its receivables. The firm
ID: 2810327 • Letter: #
Question
(Cost of factoring) MDM Inc. is considering factoring its receivables. The firm has credit sales of $300,000 per month and has an average receivables balance of $600,000 with 60-day credit terms. The factor has offered to extend credit equal to 92 percent of the receivables factored less interest on the loan at a rate of 1.5 percent per month. The 8 percent difference in the advance and the face value of all receivables factored consists of a 3 percent factoring fee plus a 5 percent reserve, which the factor maintains. In addition, if MDM Inc. decides to factor its receivables, it will sell them all, so that it can reduce its credit department costs by $1,400 a month. a. What is the cost of borrowing the maximum amount of credit available to MDM Inc. through the factoring agreement? Note: Assume a 30-day month and 360-day year. b. What considerations other than cost should MDM Inc. account for in determining whether to enter the factoring agreement? The cost of borrowing the maximum amount of credit available to MDM Inc. through the factoring agreement is l two decimal places.) %. (Round to b. What considerations other than cost should MDM Inc. account for in determining whether to enter the factoring agreement? (Select the best answer below.) OA. Of particular concern here is the presence of any government restrictions associated with factoring. In some industries, factoring simply is not used unless the firm's financial condition meets government guidelines. always used, no matter the firm's financial condition. is not used unless the firm's financial condition is critical. Of particular concern here is the presence of any "preferred status" associated with factoring. In some industries, factoring O B. Of particular concern here is the presence of any "stigma" associated with factoring. In some industries, factoring is C. Of particular concern here is the presence of any "stigma" associated with factoring. In some industries, factoring simply O D. simply is not used unless the firm's financial condition is credit worthy.Explanation / Answer
Value of receivables $600,000 (2 months) Factoring fee @ 3% $18,000 Reserve @ 5% $30,000 Interest of 1.50 % per month 16560 Loan advance $535,440 Therefore, the effective cost of credit to MDM is calculated as follows APR = 16560+18000-(1400*2)/535440*(1/(60/360)) 35.59% Interest on loan - 600000*92%*0.015*2 16560 Cost of borrowing is 35.59% The other consideration to be considered is Of particular concern here is the presence of any "stigma" associated with factoring. In some industries, factoring simply is not used unless the firm's financial condition is critical This can be seen here considering the relative high interest rate
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.