# CMA Study Group

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## PART 2 CORPORATE FINANCE FACTORING

• #### 1.  PART 2 CORPORATE FINANCE FACTORING

Posted 09-26-2022 12:50 PM
Dear Friends,

I need you help in solving this question.

Thanks

A company enters into an agreement with a firm that will factor the company's accounts receivable. The factor agrees to buy the company's receivables, which average \$100,000 per month and have an average collection period of 30 days. The factor will advance up to 80% of the face value of receivables at an annual rate of 10% and charge a fee of 2% on all receivables purchased. The controller of the company estimates that the company would save \$18,000 in collection expenses over the year. Fees and interest are not deducted in advance. Assuming a 360-day year, what is the annual cost of financing?

The first step is to calculate the amount the firm will receive from the factoring transaction:
Amount of receivables
\$100,000
×      80%
\$  80,000
This amount is the basis for the calculation of interest expense:
\$  80,000
Times: Annual finance charge
×      10%
Annualized interest expense
\$    8,000
The next step is to calculate the net outlay:
Amount of receivables
\$100,000
Times: Factor fee percentage
×        2%
Monthly factor fee
\$    2,000
Times: Months
×         12
Annual factor fee
\$  24,000
Less: Annual savings
(18,000)
Net outlay
\$    6,000
Now the net cost in dollar terms can be determined:
Annualized interest expense
\$    8,000
Net outlay
6,000
Annual net cost
\$  14,000
As with all financing arrangements, the effective rate is the ratio of the amount the firm must pay to the amount the firm gets use of:  Effective rate = Net cost ÷ Usable funds = \$14,000 ÷ \$80,000 = 17.5%

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TIMUCIN ONER
Director/Manager
ANTALYA
Turkey
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