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How to determine if giving up discount on 3/10 net 45 credit is less costly than a 14% short term financing

Personal Finance

13th Edition

ISBN:9781337669214

Author:GARMAN

Publisher:GARMAN

Chapter14: Investing In Stocks And Bonds

Section: Chapter Questions

Problem 9LTAI

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Differentiate between free and costly trade credit.What is the formula for determining the nominalannual interest rate associated with a credit policy?What is the formula for the effective annual interestrate? How would these cost rates be affected if afirm buying on credit could “stretch” either the discount days or the net payment days—that is, takediscounts on payments made after the discountperiod or else pay later than the stated paymentdate?
9.- When you decide to reject the discount and pay on the last day of the credit term, there is a cost associated with forgoing the discount. TRUE OR FALSE?
If your supplier offers 3/5 net 28, what is the implied interestrate if you choose to forgo the discount and pay on day 28?
You are developing a new product and you use a 12% discount rate to compute its NPV. Your banker, from whom you hope to obtain a loan, expresses concern that your discount rate is too low. How do you respond?
Suppose you are shopping for a mortage and the lender presents you with long menu on loan options. For each option, there is a discount point charged at an interest rate given. The amount of the point ranges anywhere from -2% to 3%. When would it be optimal for you select a loan with a discount point of 3%? Group of answer choices 1) Only when the point is equal to the effective borrowing cost 2) Never 3) Only with ARM 4) If you have a very short holding period 5) If you have a very long holding period
Total Debt Service ratio determines your "capacity to repay". What is the maximum % a client should have if they want to get a loan? 1. No more that 40% 2. No more than 32% No more than 25% 4. No more than 50% 3.
The cost of not taking the discount trade credit of 3/20, net 90 is approximately?
How to adjust EV/Revenue and EV/EBITDA multiples for illiquidity (applying an illiqudity discount of 25%)? Please provide an example. Thank You
Which statement is true when considering a loan? F. You should always take the least interest rate possible. The term of the loan doesn’t matter G. You should always take the plan with the least number of payments. The interest doesn’t matter. H. You should consider both the interest rate and the term of the loan. You have to determine which loan will fit into your budget. J. The least number of payments will always have you a smaller payback amount.
2.-When deciding to accept a cash discount from a supplier, on what day is it advisable to take the financing? A) On the last day of the discount period, to see if they are able to meet the discount. B) On the first day of the discount period, so why wait? C) On any day of the discount period D) In the middle of the discount period, so there is no risk.
3. Answer the following questions based on the information below Current credit policy(n/a) Proposed credit policy (net 30) Price (RO) 15 17 Variable cost per unit (RO) 8. 12 Quantity 200,000 300,000 Monthly rate 1.25% a. What is the incremental cash flows from switching credit policies? b. What is the cost of switching? c. What is your recommendation? d. We assume that the variable cost and the price per unit remain stable as in the current policy, calculate and interpret the break-even sales increase. e. What is the break-even probability of default if we assume one time scale? Interpret.
5. A Loan Amortization can help a Manager take advantage of lowerinterest rates. T/F 6. IRR can be used to either accept or reject a project, if compared tothe discount rate. T/F