TOUCHE ROSS & CO. 6 To compute our estimates of the cost of capital required to finance the survey members' revolving credit receivables, we first computed the average revolving credit balances for Arizona customers for each participant for the year. For the four retailers that did not have financing subsidiaries in operation for the full year, we applied the 8.9% overall weighted average percentage cost incurred by the four retailers that had financing subsidiaries in operation for all of 1970. For the four retailers whose financing subsidiaries were analyzed, we analyzed the capital structures at the beginning and end of their fiscal years. We then calculated a percentage rate cost of capital for each financing subsidiary using book weights as follows: - Short-term bank borrowings at the average prime - Commercial paper (if any) of the subsidiary at the - Long-term debt at a rate equal to the average stated - Equity at a rate equal to the weighted average We calculated each parent's weighted average cost of capital using book weights as follows: Long-term debt at a rate equal to the average - Convertible debt using the Gordon-Shapiro Dividend Preferred stock cost at a rate equal to the average Equity (paid-in capital plus retained earnings) at TOUCHE ROSS & CO. - 7 DEFINITIONS The following are the major cost items (as they apply to revolving credit), included in the captions used in Exhibits II, III, and IV: Salaries and fringe benefits of application processing and credit Salaries and fringe benefits of Salaries and fringe benefits of Salaries and fringe benefits of sales Salaries and fringe benefits of per- Salaries and fringe benefits for cor- Salaries and fringe benefits of personnel involved with credit-related keypunching, computer operations, and systems and programming. Data Processing Equipment: Rental and depreciation associated with credit-related data processing equipment. Credit Investigation Fees: Fees paid to credit bureaus. TOUCHE ROSS & CO. - 8 Bad Debt Losses: Actual bad debts written off net of bad debts recovered. Collection Agency Fees: Fees paid to outside collection agencies. Credit Space and Equipment: Rent, real property taxes, and depreciation on actual credit space and equipment used. Supplies, Postage and Other: Purchased supplies and services, postage and communications costs for revolving credit activities. Cost of Capital: Cost to finance revolving accounts receivable balances. |