Ranger Enterprises is considering pledging its receivables to finance a needed increase in working capital. Its commercial bank will lend 75 percent of the pledged receivables at 1.5 percentage points above the prime rate, which is currently 12 percent. In addition, the bank charges a service fee equal to 1 percent of the pledged receivables.
Both interest and the service fee are payable at the end of the borrowing period. Ranger's average collection period is 50 days, and it has receivables totaling $5 million that the bank has indicated are acceptable as collateral. Calculate the annual financing cost for the pledged receivables.