Question

A U.S. exporter sells $150,000 of furniture to a Latin American importer. The exporter requires the importer to obtain a letter of credit. When the bank accepts the draft, the exporter discounts the 120-day note at a 5.25 percent discount. What is the exporter's true effective annual financing cost?

Answer 1

Answer:

5.52%

Explanation:

Cost of Furniture= $150,000

discount= 5.25% (120-day note)

To get the exporter's true effective annual financing cost, we have:

$150,000*[1-(0.0525*120/360)] = 147,375$

=(150,000/147,375) 365/120-1 = 5.52%

Therefore, the exporter's true effective annual financing cost is 5.52%