Assume that Sunshine Products Inc.has an agreement with Shady Finance Company to factor its receivables.Shady charges a flat commission of 2 percent of the receivables factored,plus 6 percent a year interest on the outstanding balance.It also deducts a reserve of 10 percent for returned and damaged materials.Interest and commission are paid in advance.No interest is charged on the reserve or the commission.If the average level of outstanding receivables is $700,000,and if they are turned over 4 times a year (hence the commission is paid 4 times a year),then what is the effective quarterly interest rate charged by Shady for this arrangement?

Question

Quizplus · Accepted Answer

To calculate the effective quarterly interest rate charged by Shady, we need to use the following formula:

Effective quarterly interest rate = (1 + total annual interest rate / number of compounding periods per year)^(number of compounding periods per year) - 1

The total annual interest rate charged by Shady is the sum of the 6% interest on outstanding balance and the 2% commission on the factored receivables, which is 8%. Since the commission is paid four times a year, the number of compounding periods per year is 4.

So, the effective quarterly interest rate is:

(1 + 0.08 / 4)^(4) - 1 = 0.0383 or 3.83%

Therefore, the best choice is B.

Assume That Sunshine Products Inc