Question

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

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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B) 12.61 percent
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