Straight Problems

Effective Borrowing Rate

Effective Borrowing Rate

= Net Financing charges
Net Proceeds

Revolving Credit
Agreements
Land Company, a real estate developer, has a
Php 2 million revolving credit agreement with
a bank. Its average borrowing under the
agreement for the past year was php 1.5
million. The bank charges a commission fee of
1%. The nominal rate on used fund is 12%.
Determine the effective cost of revolving
credit agreement.

Solution

Interest paid (1.5M x 12%)

Commitment Fee [(2M - 1.5M) x
1%]
Total Financing charges
Effective Interest rate (185,000/1.5M)

180,000.00
5,000.00
185,000.00
12.33%

Issuing Commercial Paper

Sweden Company, a large ship builder, has
just isuued Php 10 million worth of
commercial paper that has a 90-day maturity
and sellsfor Php 9.85 million. The securities
are to be redeemed at par value on its
maturity date. Calculate the effective cost of
issuing the commercial paper.

Solution

Periodic effective financing 150,000/

rate
9.85M

1.53%

Annualized effective
financing rate

6.12%

1.53% x
12

Factoring Accounts
Receivable
Charlie Company, a manufacturer of childrens
rainwear is studying to factor its Php 2 million worth
accounts receivable. The factor will hold a 15% reserve,
charge on and deduct from the book value of the
factored accounts a 2% factoring commission, and
charge a 1% per month interest on advances. The
company expects to generate savings from collection in
the amount of Php 20,000. Determine the annualized
effective financing cost, assuming the factoring activity
as a single transaction and further assuming:
a. The interest is not deducted in advance
b. The interest is deducted in advance

Solution
Interest expense (2M x 85% x
1%)

17,000.00

Factor's Fee (2M x 2%)

40,000.00

Savings from collection

(20,000.00)

Net Financing charges

Cash Advance (2M x 85%)

37,000.00
Php 1.7 M

1.Effective factoring cost

37K/(1.7M-40K )
Annualized Effective factoring
cost
2.22% x 12
37K/(1.7M-17k40K )

2.Effective factoring cost

Annualized Effective factoring
cost
2.25% x 12

2.22%
26.64%

2.25%
27.00%