The Corner Store factors all of its receivables immediately at a discount rate of 1.1 percent. The average collection period is 37.4 days and default is unlikely. What is the effective cost of borrowing?

Question

Quizplus · Accepted Answer

The effective cost of borrowing when factoring receivables can be calculated using the formula: $ \text{Effective Cost} = \left( \frac{\text{Discount Rate}}{1 - \text{Discount Rate}} \right) \times \left( \frac{365}{\text{Average Collection Period}} \right) $. Here, the discount rate is 1.1% or 0.011, and the average collection period is 37.4 days. Plugging these values into the formula gives: $ \text{Effective Cost} = \left( \frac{0.011}{1 - 0.011} \right) \times \left( \frac{365}{37.4} \right) = 11.40\% $.

The Corner Store Factors All of Its Receivables Immediately at a Discount