A firm has an average collection period of 35 days and factors all of its receivables immediately at a 0.95 percent discount.Assume all accounts are collected in full.What is the firm's effective cost of borrowing?

Question

Quizplus · Accepted Answer

Interest for 35 days = 0.0095/(1 - 0.0095) = 0.0095911; Number of periods per year = 365/35 = 10.428571; EFF = (1.0095911)^10.428571 - 1 = 10.47 percent

A Firm Has an Average Collection Period of 35 Days