Your firm has an average collection period of 31 days. Current practice is to factor all receivables immediately at a discount of 1.25 percent. Assume that default is extremely unlikely.

What is the effective cost of borrowing in this case?

NOTE: If we factor immediately, we receive cash an average of 31 days sooner. The number of periods in a year are:

Number of periods (m) = 365/31

Number of periods (m) = 11.774193548

Hint: Use the EAR equation.