Answer (D) is correct . The first step is to calculate the amount the firm will receive from the factoring transaction: Amount of receivables $125,000 Times:? advance percentage ¡Á??????80% Amount received $100,000 This amount is the basis for the calculation of interest expense: Amount advanced $100,000 Answer (A) is incorrect because The interest rate on the amount advanced is 10%. Answer (B) is incorrect because The sum of the interest rate and the fee percentage is 12%. Answer (C) is incorrect because The cost of Alternative 2 is 13.2%.
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