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 percent nominal rate; (b) borrow on a 3-month, but renewable, loan basis at an 11.5 percent nominal rate; (c) borrow on an installment loan basis at a 6 percent 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?