Lepreau Books Corporation has an agreement with Hampton Bank whereby the bank handles $6 million in collections
Question:
Lepreau Books Corporation has an agreement with Hampton Bank whereby the bank handles $6 million in collections a day and requires a $375,000 compensating balance. Lepreau Books is contemplating cancelling the agreement and dividing its eastern region so that two other banks will handle its business. Banks A and B will each handle $3 million of collections a day, and each requires a compensating balance of $250,000. Lepreau Books’ financial management expects that collections will be accelerated by one day if the eastern region is divided. Should the company proceed with the new system? What will be the annual net savings? Assume that the T-bill rate is 2.5% annually.
Step by Step Answer:
Fundamentals Of Corporate Finance
ISBN: 9781259654756
10th Canadian Edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan, Gordon Roberts, J. Ari Pandes, Thomas Holloway