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Question
Doyle Knitting Mills, Ltd. is considering factoring its receivables. The firm has annual sales of $21.6 million and its average collection period is 72 days. Bad-debt losses average 1.5 percent of sales and credit department costs are $12,000 per month. Both of these costs would be eliminated if Doyle factors its receivables. The factor will charge a fee of 3 percent on all receivables it purchases from Doyle. The factor will advance up to 85 percent (i.e., 15 percent reserve for returns and allowances) of the value of the receivables at an annual interest rate of 12 percent. Interest is deducted from the amount of the advance. When converting from annual to daily data or vice versa, assume there are 365 days per year. Determine the net annual percentage financing cost of this factoring (and borrowing) arrangement.a. 17.6%
b. 14.8%
c. 7.1%
d. 22.4%
Answer
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Related questions
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