Wonder Dog Leash Company is seeking to raise cash and is in negotiation with Big Bucks finance company to pledge their receivables. BB is willing to loan funds against 75% of current (that is, not overdue) receivables at a 15% annual percentage rate (see the aging of receivables in problem 10). To pay for its evaluation of Wonder’s receivables, BB charges a 2.5 percent fee on the total balance of current receivables.
a. If the average term of a loan is 30 days, what is the effective interest rate if Wonder pledges its receivables?
b. What is the effective rate if Wonder negotiates a loan of 45 days with no other changes in the loan’s terms?