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- Topic: Level 1: Effective Borrowing Cost?
|Author||Topic: Level 1: Effective Borrowing Cost?|
|Can someone help me with this question? It's from Volume 4 (Corporate Finance and Portfolio Management) p131. The answer is in the book, but I'm not sure where the formula comes from. Thanks in advance. Here's the question:
6) Suppose a company uses trade credit with the terms of 2/10, net 50. If the company pays its account on the 50th day, the effective borrowing cost of skipping the discount on day 10 is closest to
A) 14.6 percent
B) 14.9 percent
C) 15.0 percent
D) 20.2 percent
|= (1 + D/(1-D))^ (365/40) - 1
= (1 + .02/.98)^9.125 - 1
= 20.24 Ans D
This formula is displayed on page 120 and a subsequent example follows.
CFA Discussion Topic: Level 1: Effective Borrowing Cost?
I am happy to say that I passed! Your study notes certainly helped prepare me for what was the most difficult exam I had ever taken.