Bank versus Factor. Forest Corporation needs $400,000 additional financing. The company is considering the choice of financing with a bank or a factor. The bank loan carries a 20 percent interest rate...

Bank versus Factor. Forest Corporation needs $400,000 additional financing. The company is considering the choice of financing with a bank or a factor. The bank loan carries a 20 percent interest rate on a discount basis with a required compensating balance of 16 percent. The factor charges a 3 percent commission on invoices purchased monthly. The interest rate associated with these invoices is 11 percent with interest deductible in advance. If a factor is used, there will be a monthly savings of $1,500 per month in credit department costs. Further, an uncollectible accounts expense of 2 percent on the factored receivables will not exist.

(a) What amount of principal must the company borrow from the bank to receive $400,000 in proceeds? (b) What amount of accounts receivable must be factored to net the firm $400,000? (c) What is the effective interest rate on the bank loan? (d ) What is the total annual cost of the bank arrangement? (e) What is the effective interest rate associated with the factoring arrangement? ( f ) What is the total annual cost of factoring?