Answer (B) is correct . The company will receive $100,000 ($125,000 × 80%) at an annual cost of $25,000 ($125,000 – $100,000). The effective interest rate on this loan can thus be calculated as follows: Effective rate = Interest expense ÷ Usable funds = $25,000 ÷ $100,000 = 25.0%
Answer (A) is incorrect because The effective rate must exceed the contract rate of 20%. Answer (C) is incorrect because This percentage assumes no discount and a 6-month loan term. Answer (D) is incorrect because This percentage assumes a 6-month loan term.
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