Your Firm Has an Average Collection Period of 42 Days

question 85

Multiple Choice

Your firm has an average collection period of 42 days.Current practice is to factor all receivables immediately at a 4 percent discount.Assume that default is extremely unlikely.What is the effective cost of borrowing?

• A)28.79 percent
• B)36.20 percent
• C)37.78 percent
• D)40.97 percent
• E)42.58 percent

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Definitions:

Levered Firm

A company that has debt in its capital structure, implying that it has taken on borrowing to finance its operations or growth.

Unlevered Firm

A business or company that operates without any debt financing, meaning it does not have any borrowings in its capital structure.

M&M Proposition I

A theory in corporate finance that asserts that the market value of a company is independent of its capital structure.

Homemade Leverage

refers to the strategy wherein investors adjust the amount of leverage or debt in their investment portfolios on their own, rather than relying on the borrowing strategy of the companies in which they invest.