Question

MDM Inc. is considering factoring its receivables. The firm has credit sales of ​$550 comma 000 per month and has an average receivables balance of ​$1 comma 100 comma 000 with​ 60-day credit terms. The factor has offered to extend credit equal to 89 percent of the receivables factored less interest on the loan at a rate of 1.6 percent per month. The 11 percent difference in the advance and the face value of all receivables factored consists of a 2 percent factoring fee plus a 9 percent​ reserve, which the factor maintains. In​ addition, if MDM Inc. decides to factor its​ receivables, it will sell them​ all, so that it can reduce its credit department costs by ​$1 comma 500 a month. a. What is the cost of borrowing the maximum amount of credit available to MDM Inc. through the factoring​ agreement? Note​: Assume a​ 30-day month and​ 360-day year. b. What considerations other than cost should MDM Inc. account for in determining whether to enter the factoring​ agreement? The cost of borrowing the maximum amount of credit available to MDM Inc. through the factoring agreement is nothing​%. ​(Round to two decimal​ places.)

Answer 1