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  • Accounts Receivable Provides Spontaneous Financing

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    Isaiah Cruz
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    Accounts receivable provides a spontaneous source of financing for a firm. A firm can factor its accounts receivable, where a factor purchases the receivables at a discount and charges interest and fees on the amount advanced. For a company factoring $100,000 of monthly receivables with a 30 day collection period, an 80% advance, 10% interest charge, and 2% fee, the annual cost of financing is 17.5%.

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    Management Consultancy Sample Test Materials

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    MANCON TEST QUESTIONS.docx

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    Accounts receivable provides a spontaneous source of financing for a firm. A firm can factor its accounts receivable, where a factor purchases the receivables at a discount and charges interest and fees on the amount advanced. For a company factoring $100,000 of monthly receivables with a 30 day collection period, an 80% advance, 10% interest charge, and 2% fee, the annual cost of financing is 17.5%.

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    Download as DOCX, PDF, TXT or read online from Scribd
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    118 views2 pages

    Accounts Receivable Provides Spontaneous Financing

    Uploaded by

    Isaiah Cruz
    Accounts receivable provides a spontaneous source of financing for a firm. A firm can factor its accounts receivable, where a factor purchases the receivables at a discount and charges interest and fees on the amount advanced. For a company factoring $100,000 of monthly receivables with a 30 day collection period, an 80% advance, 10% interest charge, and 2% fee, the annual cost of financing is 17.5%.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
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    of 2

    1.

    Which one of the following provides a spontaneous source of financing for a firm? a. Accounts Payable b. Mortgage Bonds c. Accounts Receivable d. Debentures Commercial Paper a. Has a maturity data greater than 1 year b. Is usually sold only through investment banking dealers c. Ordinarily does not have an active secondary market d. Has an interest rate lower than Treasury bills

    CMA

    2.

    CMA

    3.

    The credit instrument known as a bankers acceptance a. Calls for immediate payment up on delivery of the shipping documents to the banks customer and acceptance of goods by the bank. b. Involves an invoice being signed by the banker upon receipt of goods, after which both the banker and the seller record the transaction on their respective books. c. Is a time draft payable on a specific date and guaranteed by the bank. d. Is a method of sales financing in which the bank retains title to the goods until the buyer has completed payment. CIA A short-term bank loan will have a higher effective financing cost if it has which combination of characteristics? a. A 10% compensating balance and regular interest. b. A 10% compensating balance and discount interest. c. A 20% compensating balance and regular interest. d. A 20% compensating balance and discount interest. CIA Short-term interest rates are a. Usually lower than long-term rates. b. Usually higher than long-term rates. c. Lower than long-term rates during periods of high inflation only. d. Not significantly related to long-term rates.

    4.

    5.

    CMA

    6.

    A company enters into an agreement with a firm that will factor the companys accounts receivable. The factor agrees to buy the companys receivables, which average P100,000 p er month and have an average collection period of 30 days. The factor will advance up to 80% of the face value of receivables at an annual rate of 10% and a charge fee of 2% on all receivables purchased. The controller of the company estimates that the company would save P18,000 in collection expenses over the year. Fees and interest are not deducted in advance. Assuming a 360-day year, what is the annual cost of financing? a. 10.00% b. 12.00% c. 14.00% d. 17.50% CMA Interest Expense (P80,000 x 10%) Charges (P1,200,000 x 2%) Savings from factoring Net interest and charges incurred Annual factoring cost (P14,000/P80,000) P 8,000 24,000 (18,000) P14,000 17.50%

    7.

    Loofah Company, a real estate developer, has a P2,000,000 revolving credit arrangement with a bank. Its average borrowing under the agreement for the past year was P1,500,000. The bank charges a

    commission fee of 1%. The nominal rate on used fund is 12%. Determine the effective cost of the revolving credit agreement. a. 11.00% b. 12.33% c. 15.00% d. 17.67% CMA Interest paid (P1,500,000 x 12%) Commitment fee [(P2,000,000-P1,500,000) x 1%] Total financing charges Effective interest rate (P185,000/P1,500,000) 8. P180,000 5,000 P185,000 12.33%

    Ship Company, a large ship builder, has just issued P10,000,000 worth of commercial paper that has 90-day maturity and sells for P9,850,000. The securities are to be redeemed at par value on its maturity date. Calculate the effective cost of issuing the commercial paper. a. 1.53% b. 2.45% c. 6.12% d. 9.90% CMA Periodic effective financing rate P150,000/ P9,850,000 = 1.53% Annualized effective financing rate 1.53% x 360/90 = 6.12%

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