Question

MiraWest Enterprises has sold a combination of films and DVDs to Hong Kong Media Incorporated for US$ 116 comma 000 ​, with payment due in seven months. MiraWest has the following alternatives for financing this​ receivable:

(1) use its bank credit line. Interest would be at the prime rate of 5.2 ​% plus 150 basis points per​ annum; or​
(2) Use its bank credit line but purchase export credit insurance for a 1 ​% fee. Because of the reduced​ risk, the bank interest rate would be reduced to 5.2 ​% per annum without any points. In both cases MiraWest would need to maintain a compensating balance of 22 ​% of the​ loan's face​ amount, and no interest will be paid on the compensating balance by the bank.
a. What are the annualized percentage​ all-in costs of each​ alternative?
b. What are the advantages and disadvantages of each​ alternative?
c. Which alternative would you​ recommend? ​(NOTE: Assume a​ 360-day year.)
Question content area bottom Part 1
a. What are the annualized percentage​ all-in costs of each​ alternative?
Alternative​ 1: Bank Credit Line The bank interest expense on the receivable is ​$enter your response here . ​(Round to the nearest​ cent.)

Answer 1

To answer MiraWest Enterprises' question on financing a receivable, specific interest rate information is needed. The scenario, however, illustrates business financial management concerning film production and distribution, and banking operations in the context of loans and reserves.

Step-by-step explanation:

The student's question pertains to the different financing alternatives available to MiraWest Enterprises for a receivable from Hong Kong Media Incorporated. To provide an answer on the interest expense using the bank credit line option, critical additional information such as the interest rate for the credit line would be necessary, which currently is not provided in the given question.

However, the core subject of this inquiry involves understanding how businesses like MiraWest can recover costs involved in the production, advertising, and distribution of films and DVDs through various revenue streams such as box office sales, DVD sales, broadcast rights to television, subscriptions to streaming services like Netflix, and product placement deals.

Furthermore, the explanation of how Singleton Bank loans out money, indicating a loan on its balance sheet as an asset while detailing the fractional reserve banking system, reinforces the concepts of business financing and banking operations.