Your firm has an average collection period of 42 days. Current practice is to fa

Question

Your firm has an average collection period of 42 days. Current practice is to factor all receivables immediately at a 2 percent discount.

What is the effective cost of borrowing in this case? Assume that default is extremely unlikely. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

What is the effective cost of borrowing in this case? Assume that default is extremely unlikely. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

EAR = Effective Annual Rate =19.19% Working Number of periods = 365/42 = 8.6905 EAR = {1 + [0.02/(1 - 0.02)]^ 8.6905 - 1 = 19.19 percent

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.