Principles of Managerial Finance

CHAPTER 15 Current Liabilities Management 663

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80% of the acceptable collateral (after adjusting for returns and allowances).

What level of funds would be made available through this lending source?

15–15 Accounts receivable as collateral Springer Products wishes to borrow $80,000

from a local bank using its accounts receivable to secure the loan. The bank’s

policy is to accept as collateral any accounts that are normally paid within 30

days of the end of the credit period, as long as the average age of the account is

not greater than the customer’s average payment period. Springer’s accounts

receivable, their average ages, and the average payment period for each customer

are shown in the following table. The company extends terms of net 30 days.

a. Calculate the dollar amount of acceptable accounts receivable collateral held

by Springer Products.

b. The bank reduces collateral by 10% for returns and allowances. What is the

level of acceptable collateral under this condition?

c. The bank will advance 75% against the firm’s acceptable collateral (after

adjusting for returns and allowances). What amount can Springer borrow

against these accounts?

15–16 Accounts receivable as collateral, cost of borrowing Maximum Bank has ana-

lyzed the accounts receivable of Scientific Software, Inc. The bank has chosen

eight accounts totaling $134,000 that it will accept as collateral. The bank’s

terms include a lending rate set at prime3% and a 2% commission charge.

The prime rate currently is 8.5%.

a. The bank will adjust the accounts by 10% for returns and allowances. It then

will lend up to 85% of the adjusted acceptable collateral. What is the maxi-

mum amount that the bank will lend to Scientific Software?

b. What is Scientific Software’s effective annual rate of interest if it borrows

$100,000 for 12 months? For 6 months? For 3 months? (Assume that the

prime rate remains at 8.5% during the life of the loan.)

15–17 Factoring Blair Finance factors the accounts of the Holder Company. All eight

factored accounts are shown in the following table, with the amount factored,

the date due, and the status on May 30. Indicate the amounts that Blair should

Account Average age Average payment

Customer receivable of account period of customer

A $20,000 10 days 40 days

B 6,000 40 35

C 22,000 62 50

D 11,000 68 65

E 2,000 14 30

F 12,000 38 50

G 27,000 55 60

H 19,000 20 35