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LoDo Tiles Inc. is considering factoring its receivables. The company's average collection period is 55 days, and its average level of receivables is $750,000. The factor has indicated that it requires a 15% reserve for returns and allowances, and charges a 2.5% factoring commission, with the commission to be paid up front. The factor will advance LoDo Tiles funds at 2.0 percentage points over the prime lending rate, which is currently 5.0 %. Interest is to be paid up front. Determine the effective annual rate of the factoring. Assume 365 days in a year 26.8% 30.8% 25.6% 33.4%

LoDo Tiles Inc. is considering factoring its receivables. The company's average collection period is 55 days, and its average level of receivables is $750,000. The factor has indicated that it requires a 15% reserve for returns and allowances, and charges a 2.5% factoring commission, with the commission to be paid up front. The factor will advance LoDo Tiles funds at 2.0 percentage points over the prime lending rate, which is currently 5.0 %. Interest is to be paid up front. Determine the effective annual rate of the factoring. Assume 365 days in a year 26.8% 30.8% 25.6% 33.4%

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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LoDo Tiles Inc. is considering factoring its receivables. The company's average collection period is 55 days, and its average level of receivables is $750,000. The factor has indicated that it requires a 15% reserve for returns and allowances, and charges a 2.5% factoring commission, with the commission to be paid up front. The factor will advance LoDo Tiles funds at 2.0 percentage points over the prime lending rate, which is currently 5.0 %. Interest is to be paid up front. Determine the effective annual rate of the factoring. Assume 365 days in a year 26.8% 30.8% 25.6 % 33.4%
Transcribed Image Text:LoDo Tiles Inc. is considering factoring its receivables. The company's average collection period is 55 days, and its average level of receivables is $750,000. The factor has indicated that it requires a 15% reserve for returns and allowances, and charges a 2.5% factoring commission, with the commission to be paid up front. The factor will advance LoDo Tiles funds at 2.0 percentage points over the prime lending rate, which is currently 5.0 %. Interest is to be paid up front. Determine the effective annual rate of the factoring. Assume 365 days in a year 26.8% 30.8% 25.6 % 33.4%
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