Hyper Retail Outlets sell goods on terms of net 40.The store's average monthly sales (all on credit)are $70,000.Hyper pledges all of its receivables to the bank,which advances 80% of the face value of the receivables at a rate of 2.5% above prime.The bank also charges a 1% processing fee on all receivables pledged.Hyper borrows the full amount possible,and the current prime rate is 5%.What is the annual percentage rate (APR)of using this source of financing for one full year?
A) 23.5%
B) 22.5%
C) 21.8%
D) 19.1%

Question

Quizplus · Accepted Answer

First, we need to calculate the average amount of accounts receivable that Hyper pledges to the bank. This can be found by dividing the monthly sales by the net 40 terms:
$70,000 / 40 = $1,750 (average amount of accounts receivable)
Next, we need to calculate the amount of the bank advance. The bank advances 80% of the face value of the receivables, so:
$1,750 x 80% = $1,400 (bank advance)
The bank charges a 2.5% above prime rate, so:
Prime rate + 2.5% = 5% + 2.5% = 7.5%
The bank also charges a 1% processing fee on all receivables, so the effective interest rate is:
7.5% + 1% = 8.5%
To calculate the APR, we need to multiply the effective interest rate by the number of times per year that the financing is used. Since Hyper pledges its receivables every month, the financing is used 12 times per year:
8.5% x 12 = 102%
Therefore, the APR of using this source of financing for one full year is 22.5% (rounded to the nearest tenth).

Hyper Retail Outlets Sell Goods on Terms of Net 40