The Frame Supply Company has just acquired a large account and needs to increase its working capital by $100,000. The controller of the company has identified four alternative sources of funds:
Pay a factor to buy the company's receivables, which average $125,000 per month and have an average collection period of 30 days. The factor will advance up to 80% of the face value of receivables at 10% and charge a fee of 2% on all receivables purchased. The controller estimates that the firm would save $24,000 in collection expense over the year. Assume that the fee and interest are not deductible in advance.
Borrow $110,000 from a bank at 12% interest. A 9% compensating balance would be required.
Issue $110,000 of 6-month commercial paper to net $100,000. (New paper would be issued every six months.)
Borrow $125,000 from a bank on a discount basis at 20%. No compensating balance would be required.
Assume a 360-day year on all of your calculations.
The cost of Alternative 3 is:
A.
10.0%.
B.
11.1%.
C.
18.2%.
Correct D.
20.0%.
Okay, so I get the math its 20,000 divided by 100,000. I get the $20,000 because you are borrowing for a full year and are paying the interests twice, but if you are borrowing another $110,000 shouldn't it be $20,000 divided by $200,000 and the correct answer 10%?
Help
.