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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 $250,000 that it will accept as collateral. The bank's terms include a lending rate set at primeplus+2.5% and a 1.5% commission charge. The prime rate currently is 8%.

a. The bank will adjust the accounts by 10% for returns and allowances. It then will lend up to 90?% of the adjusted acceptable collateral. What is the maximum amount that the bank will lend to Scientific Software?

b. What is Scientific Software's effective annual rate of interest if it borrows $150,000 for 12 months For 6 months For 3 months (Note: Assume a 365-day year and a prime rate that remains at 8 % during the life of the loan.)

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92746004

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