The Marlow Sales and Distribution Co. needs $540 comma 000 for the 3-month period ending September...
The Marlow Sales and Distribution Co. needs $540 comma 000 for the 3-month period ending September 30, 2015. The firm has explored two possible sources of credit.
a. Marlow has arranged with its bank for a $540 comma 000 loan secured by its accounts receivable. The bank has agreed to advance Marlow 75 percent of the value of its pledged receivables at a rate of 9 percent plus a 1 percent fee based on all receivables pledged. Marlow's receivables average a total of $1 million year-round.
b. An insurance company has agreed to lend the $540 comma 000 at a rate of 7 percent per annum, using a loan secured by Marlow's inventory of salad oil. A field-warehouse agreement would be used, which would cost Marlow $2 comma 000 a month. Which source of credit should Marlow select? Explain. Note: Assume a 30-day month and 360-day year.
Homework Answers
a. Cost of bank loan for 3 months:
loan amount*(interest rate+fee)*90/360
$540,000*(0.09+0.01)*90/360 = $540,000*0.10*90/360 = $54,000*90/360 = $4,860,000/360 = $13,500
Cost of bank loan for 3 months is $13,500.
b. Cost of loan from insurance company:
[$540,000*(0.07)*90/360] + $2,000*3 = ($37,800*90/360) + $6,000 = ($3,402,000/360) + $6,000 = $9,450 + $6,000 = $15,450
Cost of loan from insurance company for 3 months is $15,450.
So, Marlow should select loan from its bank source of credit as it's cost of $13,500 is lower than cost of loan from insurance company of $15,450.
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