Introduction to Finance

b. 
What is the eff ective rate if Wonder negotiates a loan of 45 days 
with no other changes in the loan’s terms?
12. 
Michael’s Computers is evaluating proposals from two diff erent 
factors that will provide receivables fi nancing. Big Fee Factoring will 
fi nance the receivables at an annual percentage rate (APR) of 8 per-
cent, discounted, and charges a fee of 4 percent. High Rate Factoring 
off ers an APR of 14 percent (nondiscounted) with fees of 2 percent. 
The average term of either loan is expected to be 35 days. With an 
average receivables balance of $250,000, which proposal should 
Michael’s accept?
13. 
Michael’s Computers’ local bank off ers the fi rm a 12-month 
revolving credit agreement (revolver) of $500,000. The revolver’s 
APR is 12 percent with a commitment fee of 0.5 percent on the 
unused portion.
Over the course of a year, Michael’s chief fi nancial offi
cer (CFO) 
believes it will have an average balance of $280,000 on the revolver, 
with a low of $50,000 and a high of $450,000. What is the annual 
eff ective cost of this proposed agreement?
14. 
Banc Two wants to attract Michael’s Computers Inc. to become 
a customer. Their sales force contacts Michael’s and off ers them line 
of credit fi nancing. The line of credit will be for $500,000 with a 
one month clean-up period. The APR on borrowed funds is 11 per-
cent. Banc Two will off er the line of credit if Michael’s opens an 
account and maintains an average balance of $100,000 over the next 
12 months. As in Problem 13, ignoring compensating balances, 
Michael’s CFO believes its fi nancing needs will average $280,000 
monthly over the next year, with a low monthly need of $50,000 and 
a high need forecast of $450,000.
a. 
Will the line of credit satisfy Michael’s needs for short-term 
funds?