Question

XYZ has accounts receivable with an average collection period of 25 days. A factor is willing...

XYZ has accounts receivable with an average collection period of 25 days. A factor is willing to finance the accounts receivable at 99% of face value. What is the effective annual rate on this financing?

A. 14.0%

B. 15.8%

C. 21.2%

D. none of the above

Homework Answers

Answer #1
A B C D E F G H I J K
2
3 Face Value (F) $1,000 (Assumed)
4 Price (P) $990 =D3*99%
5
6 Period(n) 25 days (Since accounts receivable will be repaid in 25 days)
7 0.068493 Year
8
9 Let r be the effective rate then
10
11 Price =F/ (1+r)n
12 or
13 $999 =$1000 / (1+r)0.0685
14
15 Solving the above equation,
16
17 r 15.80% =((D3/D4)^(1/D7))-1
18
19 Hence effective interest rate is 15.80%
20 Thus the option (B) is correct.
21
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