Friendly’s Quick Loans, Inc., offers you $7.25 today but you must repay $9.25 wh

Question

Friendly’s Quick Loans, Inc., offers you $7.25 today but you must repay $9.25 when you get your paycheck in one week (or else). Requirement 1: What is the effective annual return Friendly’s earns on this lending business? (Round your answer as directed, but do not use rounded numbers in intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Effective annual return % Requirement 2: If you were brave enough to ask, what APR would Friendly’s say you were paying?

Explanation / Answer

Effective annual return (EAR) = (1+APR÷n)^n-1

n is number of compounding per year

= (1+($2÷$7.25))^52-1

= (1+27.59%)^52-1

= 31,802,684.51%

APR = ($2÷$7.25)×52

= 1,434.48%

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