Assume the Following Facts About a Firm That Borrows by Pledging

question 167

Multiple Choice

Assume the following facts about a firm that borrows by pledging its receivables: $\begin{array}{ll}\text { Average balance of accounts receivable }&\$60,000\\\text { Annual receivables turnover ( } 360 / \mathrm{ACP}) & 6 \mathrm{x} \\\text { Administrative fee charged on all new receivabless } & 1.5 \% \\\text { Interest rate on outstandingloans } & 11.5 \% \\\text { Percent of receivables accepted } & 75 \%\end{array}$ What is the effective cost of financing stated as an annual rate?

• A) 23.5%
• B) 13%
• C) 13.5%
• D) 16.83%

---

Definitions:

Equilibrium Price

The price at which the quantity of a good or service demanded equals the quantity supplied, resulting in market balance.

Demand

The willingness and ability of consumers to purchase goods or services at a given price level.

Supply

The complete quantity of a product or service that can be bought at a particular price point.

Price Floor

A legally established minimum price for a good, or service. Normally set at a price above the equilibrium price.