Johnson Enterprises Inc. Is involved in the manufacture and sale of electronic components used in small AM/FM radios. The firm needs $300,000 to finance an anticipated expansion in receivables due to increased sales. Johnson's credit terms are net 60, and its average monthly credit sales are $200,000. In general, the firm's customers pay within the credit period; thus, the firm's average accounts receivable balance is $400,000. Chuck Idol, Johnson's comptroller, approached the firm's bank with a request for a loan for the $300,000 using the firm's accounts receivable as collateral. The bank offered to make a loan at a rate of 2 percent over prime plus a 1 percent processing charge on all receivables pledged.
Furthermore, the bank agreed to lend up to 75 percent of the face value of the receiv- ables pledged.Estimate the cost of the receivables loan to Johnson when the firm borrows the $300,000. The prime rate is currently 11 percent. b. Idol also requested a line of credit for $300,000 from the bank.The bank agreed to grant the necessary line of credit at a rate of 3 percent over prime and required a 15 percent com- pensating balance.Johnson currently maintains an average demand deposit of $80,000. Estimate thje cost of the line of credit to Johnson.Which source of credit should Johnson select? Why?