Question

Accounts receivable as collateral, cost of borrowing Maximum Bank has analyzed the accounts receivable of Scientific Software, Inc. The bank has chosen eight accounts totaling S200000 that it will accept as collateral. The bank's terms include a len ing rate set at p me + 3 5% and a 1 5% or mission dare The p in rate currently is 9%. a. The bank will adjust the accounts by 10% for returns and allowances amount that the bank will lend to Scientific Software? it then will lend up to 85% of the a usted acceptable collateral what is the maximum b. What is Scientific Software's effective annual rate of interest if it borrows $120,000 for 12 months? For 6 months? For 3 months? (Note: Assume a 365-day year and a prime rate that remains at 9% during the life of the loan ) a. The maximum amount that the bank will lend to Scientific Software is b. If the firm borrows $120.000 for 12 months, the effective annual rate is [ lf the firm borrows $120,000 for only 6 months the effective annual rate is If the firm only borrows $120,000 for 3 months the offective annual rate is [ s(Round to the nearest dolla) Round to two decimal places ) Round to two decimal places ) Round to two decimal places ) % %.

Answer 1

1. The maximum amount that bank will land = [$200000 - ($200000 ´ 0.10)] ´ 0.85 = 153000

If compounding is done annually

2. Interest cost = (120000*1.5%)+(120000*12.5%) = 16800

Effective Annual rate for 12 months = 16800/120000 = 14%

If compounding is done semiannually

3. Interest cost = (120000*1.5%)+(120000*12.5%)/2 = 9300

Interest rate semiannual =9300/120000 = .0775 = 7.75%

Effective Annual rate for 6 months =(1+r%)^n -1 =(1+7.75%)^2 -1 = 16.1%

      

4. If compounding is done quarterly

Interest cost = (120000*1.5%)+(120000*12.5%)/4 = 5550

Interest rate semiannual = 5550/120000 = .04625 = 4.625%

Effective Annual rate for 3 months =(1+r%)^n -1 =(1+4.625%)^4 -1 = 19.82%