Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 21, Problem 10P
The D.J. Masson Corporation needs to raise $500,000 for 1 year to supply working capital to a new store. Masson buys from its suppliers on terms of 3/10, net 90, and it currently pays on the 10th day and takes discounts. However, it could forgo the discounts, pay on the 90th day, and thereby obtain the needed $500,000 in the form of costly trade credit. What is the effective annual interest rate of this trade credit?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
-Due to the peso devaluation, a car of costing P150,000 is to be purchased through a finance company instead of paying cash. If the buyer is required to pay P40,000 as down payment and P4,000 each month for four years, what is the effective interest rate on the diminishing balance?
FINCORP has two debtors who each make a $10, 000 purchase. Debtor 1 pays their account in 10 days, while debtor 2 pays in 30 days.
a) In simple terms, what nominal annual interest rate is debtor 2 incurring for the benefit of delaying payment?
Note: base your answer on the following logic. If a borrower pays 3% for a 30-day loan, we could express the nominal annual rate as roughly 36.5% i.e 3% x 365/30 = 36.5%
that payment is due within 30 days but debtors will receive a 5 percent discount if they pay within 14 days.
I'm quite unsure if that 5% as it is a discount, is handy or the steps to calculate the nominal interest rate
Wrexham Corp. (WC) purchases computer parts from its suppliers 1/15, net 30. However, to take advantage of the discount WC needs to get a bank loan. The bank charges 8% interest (APR) and a one percent origination fee for the loan (assume the loan is for 1 year and is renewed yearly). What is the effective annual cost of not taking the trade discount? What is the effective cost of the bank loan? Should WC take out the bank loan to take advantage of the trade credit?
Chapter 21 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 21 - a. Working capital; net working capital; net...Ch. 21 - Prob. 2QCh. 21 - Is it true that, when one firm sells to another on...Ch. 21 - What are the four elements of a firm’s credit...Ch. 21 - Prob. 5QCh. 21 - Prob. 6QCh. 21 - Prob. 7QCh. 21 - Is it true that most firms are able to obtain some...Ch. 21 - What kinds of firms use commercial paper?Ch. 21 - Prob. 1P
Ch. 21 - Medwig Corporation has a DSO of 17 days. The...Ch. 21 - What are the nominal and effective costs of trade...Ch. 21 - A large retailer obtains merchandise under the...Ch. 21 - A chain of appliance stores, APP Corporation,...Ch. 21 - Prob. 6PCh. 21 - Calculate the nominal annual cost of nonfree trade...Ch. 21 - If a firm buys on terms of 3/15, net 45, but...Ch. 21 - Grunewald Industries sells on terms of 2/10, net...Ch. 21 - The D.J. Masson Corporation needs to raise...Ch. 21 - Negus Enterprises has an inventory conversion...Ch. 21 - Strickler Technology is considering changes in its...Ch. 21 - Payne Products had $1.6 million in sales revenues...Ch. 21 - Dorothy Koehl recently leased space in the...Ch. 21 - Suppose a firm makes purchases of $3.65 million...Ch. 21 - The Thompson Corporation projects an increase in...Ch. 21 - The Raattama Corporation had sales of $3.5 million...Ch. 21 - Karen Johnson, CFO for Raucous Roasters (RR), a...Ch. 21 - Prob. 2MCCh. 21 - Prob. 3MCCh. 21 - Prob. 4MCCh. 21 - Prob. 5MCCh. 21 - Prob. 6MCCh. 21 - Prob. 7MCCh. 21 - Prob. 8MCCh. 21 - What is the impact of higher levels of accruals,...Ch. 21 - Prob. 10MCCh. 21 - Prob. 11MCCh. 21 - Prob. 12MCCh. 21 - Prob. 13MCCh. 21 - Prob. 14MCCh. 21 - Prob. 15MCCh. 21 - Prob. 16MC
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Victory Markets, LLC ("VML") has a bank loan with a total principal of $3,800,000. The stated annual interest rate for the loan is 8.40%, and the loan is to be amortized with monthly payments over 6 years. VML wants the bank to change the provisions of the loan such that payments are made on an annual basis. What would be the economically equivalent annual interest rate (i.e., economically equivalent to 8.40% compounded monthly) for a loan with annual payments? 8.6632% 8.7311% 9.0023% 8.5987%arrow_forwarda) You want to receive $ 15 million in 30 years for a major purchase. If a financial institution offers 2. 125 % per year, how much should you invest (one time) today to make this happen? b) You want to buy a house that currently costs $ 350,000. The bank requires 22% down and 12-year mortgage rates are around 4.02%. Ignoring other costs and expenses associated with the house, what would your quarterly payments be? Ignore tax and insurance payments. How long wil it take you to multiply your money five hundred-fold if a bank offered you 5. 00% per year? Assume quarterly payments.arrow_forwardA buyer is considering purchasing a 10-acre parcel in Peoria, Arizona for economic development. The parcel has a sales price of $720,000. The buyer agrees with the seller for purchasing the property with 15% down up front and paying off the balance in 12-months. If a bank is willing to provide 3% annual interest, compounded monthly, how much should the monthly deposit be into that account to pay off the desired balance to the seller?arrow_forward
- Capital Computer Corporation takes out a $10,000 loan to finance the purchase of new physical capital. It must repay the loan in full with interest in one year. The interest rate is 10 percent and the applicable corporate tax rate is 30 percent. What is the present value savings from the deductibility of the interest payment from Capital Computer Corporation’s taxes? Please round your answer to the nearest dollar.arrow_forwardRed Lizard Construction just borrowed $57,000.00. The terms of the loan require the company to make equal monthly payments forever. The first monthly payment is due in 1 month. If the regular monthly loan payment is S 550.00, then what is the EAR of the loan? A rate less than 9.62% or a rate greater than 12.53% A rate equal to or greater than 9.62% but less than 10.91% A rate equal to or greater than 11.90% but less than 12.53% A rate equal to or greater than 11.40% but less than 11.90% A rate equal to or greater than 10.91% but less than 11.40%arrow_forwardAutomotive Accessories needs to borrow $135,000 for 6 months for renovations. It is considering two financing options: Bank Helping Hand offers an 8% annual rate subject to a 10% compensating balance. Bank Friendly Financer offers the funds as a discount loan with an annual rate of 8%. Automotive Accessories maintains no deposit balances in either bank, and repayment will be a single lump sum at maturity. a.What is the effective annual rate of interest on each loan? b.What can Automotive Accessories do to reduce the interest rates on these loans?arrow_forward
- Tokyo Corporation must pay its supplier P500,000. Tokyo Corp's bank has advertised a 270-day loan with simple interest at a rate of 12 percent. On business loans, the bank requires a 20 percent compensating balance. What is the loan's effective annual rate (rEAR) if Tokyo Corporation currently holds no funds with the lending bank? In your calculations, assume that a year has 360 days. a. 12.00% b. 11.35% c. 15.00% d. 11.25% e. 15.27%arrow_forwardTwo years ago, Luckett Land Developers Inc. borrowed $350,000 at a nominal interest rate of 4% compounded quarterly. Due to an economic slowdown, Luckett will be unable to pay off the loan, which is due today. Johnson City Bank has agreed to refinance the loan amount due, plus another $100,000 at a nominal interest rate of 3% compounded monthly. The new loan must be paid off 2 years from now. How much will Luckett owe when the new loan must be paid off?arrow_forwardA bank has made a 3-year $10 million dollar loan that pays annual interest of 8%. The principal is due at the end of the third year. A. The bank is willing to sell this loan with recourse at 8.5% discount rate. What should it expect for selling this loan? B. It also has the option of selling this loan without recourse at a discount rate of 8.75%. What should it expect for selling this loan? C. If the bank expects a ½% probability of default on this loan, is it better off selling this loan with or without recourse? It expects to receive no interest payments or principal if the loan is defaulted. D. Why do you think that the interest rate in part A is different from the interest rate in part B?arrow_forward
- Aerotron Electronics has just bought a used delivery truck for $15,000. The small business paid $1,000 down and financed the rest, with the agreement to pay nothing for the entire first year and then to pay $576.83 at the end of each month over years 2, 3, and 4 (first payment is in 13th month). a. What nominal interest rate is Aerotron paying on the loan? % b. What effective interest rate are they paying? % Round your answer to 4 decimal places for a and b. The tolerance is ± 0.0005. c. How much of the 14th month's payment is interest? How much is principal? payment interest = $ , and principal = $ d. How much of the 18th month's payment is interest? How much is principal? payment interest = $ , and principal = $ e. How much of the 22nd month's payment is interest? How much is principal? payment interest = $ , and principal = $ Round your answers to the nearest whole dollar for c-e. The tolerance is ± 5.arrow_forwardA home buyer makes $250,000 per year. It has $300,000 save for the downpayment plus enough to cover closing costs and any bank required savings. The bank uses one back ratio for approval of 48% on 80% LTV loans, which is what the borrower expects to put down. Taxes and insurance generally are $3,000 per month. The rate on a 30 year amortization loan would be 3%. The purchaser has a car loan of $500 per mont, student loans of $1,000 per month, credit cards of $300 per month. Given the down payment, ltv, and back ratio, how much can the purchaser spend on a housearrow_forwardPaymaster Enterprises has arranged to finance its seasonal working capital needs with a short term bank loan. The loan will carry a rate of 0.072 per anum paid in advance (discounted). If Paymaster plans to borrow $760000 for a period of 7 months, what is the cost of the loan.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Debits and credits explained; Author: The Finance Storyteller;https://www.youtube.com/watch?v=n-lCd3TZA8M;License: Standard Youtube License