Hyper Retail Outlets sell goods on terms of net 40

Business Mar 24, 2021

Hyper Retail Outlets sell goods on terms of net 40. The store's average monthly sales (all on credit) are $70,000. Hyper pledges all of its receivables to the bank, which advances 80% of the receivables at a rate of 2.5% above prime. The bank also charges a 1% processing fee on all receivables pledged. Hyper borrows the full amount possible, and the current prime rate is 5%. What is the annual rate of using this source of financing for one full year?

a. 21.8%

b. 23.5%

c. 22.5%

d.19.1%

Expert Solution

Option C : 22.50% is correct.

Annual percentage rate = (prime rate + premium) x (prime rate + premium)/ premium

= ( 0.05+0.025) x (0.05+0.025)/0.025

= 0.075 x 3

= 22.50%

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