Effective Cost of Short-Term Credit Yonge Corporation must arrange financing for its working capital requirements for the coming year. Yonge can
(a) Borrow from its bank on a simple interest basis (interest payable at the end of the loan) for 1 year at a 12% nominal rate,
(b) Borrow on a 3-month, but renewable, loan basis at an 11.5% nominal rate,
(c) Borrow on an installment loan basis at a 6% add-on rate with 12 end-of-month payments, or
(d) Obtain the needed funds by no longer taking discounts and thus increasing its accounts payable. Yonge buys on terms of 1/15, net 60. What is the effective annual cost (not the nominal cost) of the least expensive type of credit, assuming 360 days per year?
This question was answered on: Jul 11, 2017
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