Assume that Sunshine Products Inc has an agreement with Shady Finance Company

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Assume that Sunshine Products Inc has an agreement with Shady Finance Company to factor its receivables. Shady charges a flat commission of 2 percent of the receivables factored, plus 6 percent a year interest on the outstanding balance. It also deducts a reserve of 10 percent for returned and damaged materials. Interest and commission are paid in advance. No interest is charged on the reserve or the commission. If the average level of outstanding receivables is $700,000 and if they are turned over 4 a year, then what is the effective quarterly interest rate charged by Shady for this arrangement?

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