Question

The Clear Water Company would be permitted to borrow up to 65% of its current account receivables balance of $750,000 for 90 days. The annual interest rate would be 12 percent due at maturity. The lender also charges a service fee of 2% of the account receivables balance, which is due at the time of borrowing agreement and NOT at maturity. What is annual cost of financing for Clear Water?

Answer 1

Finance available

Particulars	Calculation	Amount
Total debtors		750,000
Debtors financed	750,000 * 65%	487,500
Less: Lenders fees	487,500 * 2%	( 9,750 )
Total finance available		477,750

Cost of finance

Particulars	Calculation	Amount
Lenders fees	487,500 * 2%	9,750
Interest Cost	487,500 * 12% * 90 / 365	14,424.66
	Cost of finance	24,174.66

Cost of finance = 24174.66 / 477,750

                        = 5.06 %

Annualised cost of finance = 5.06% * ( 365 / 90 )

                                          = 20.52% Answer