Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Textbook Question
Chapter 21, Problem 8P
- a. If a firm buys on terms of 3/15, net 45, but actually pays on the 20th day and still takes the discount, what is the nominal cost of its nonfree trade credit?
- b. Does it receive more or less credit than it would if it paid within 15 days?
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a. If a firm buys under terms of 3/15, net 30, but actually pays on the 20th day and still takes the discount, what is the nominal cost of its nonfree trade credit?
Assume a 365-day year. Do not round intermediate calculations. Round your answer to two decimal places.
%
Assume the credit terms offered to your firm by your suppliers are 2/20, net 40. Calculate the cost of the trade credit if your firm does not take the discount and pays on day 40. (Hint: Use a 365-day year.)
Assume the credit terms offered to your firm by your suppliers are 2/15, net 30 . Calculate the cost of the trade credit if your firm does not take the discount and pays on day 30 . (Hint: Use a 365 -day year.)
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
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- Suppose a firm makes purchases of $3.65 million per year under terms of 2/10, net 30, and takes discounts. What is the average amount of accounts payable net of discounts? (Assume the $3.65 million of purchases is net of discounts—that is, gross purchases are $3,724,489.80, discounts are $74,489.80, and net purchases are $3.65 million.) Is there a cost of the trade credit the firm uses? If the firm did not take discounts but did pay on the due date, what would be its average payables and the cost of this nonfree trade credit? What would be the firm’s cost of not taking discounts if it could stretch its payments to 40 days?arrow_forwardWhy is some trade credit called free while other credit is called costly? If a firm buys on terms of2/10, net 30, pays at the end of the 30th day, and typically shows $300,000 of accounts payableon its balance sheet, would the entire $300,000 be free credit, would it be costly credit, or wouldsome be free and some costly? Explain your answer. No calculations are necessary.arrow_forwardA firm buys on terms of 2/10, net 30, but generally does not pay until 40 days after the invoice date. Its purchases totaled $1,095,000 per year. How much “non-free” trade credit does the firm use on average each year? What is the nominal cost of “non-free” trade credit? What is the effective cost rate of the costly credit?arrow_forward
- (Related to Checkpoint 18.2) (Evaluating trade credit discounts) If a firm buys on trade credit terms of 5/15, net 90 and decides to forgo the trade credit discount and pay on the net day, what is the annualized cost of forgoing the discount (assume a 365-day year)? The annualized cost of the trade credit terms of 5/15, net 90 is %. (Round to two decimal places.)arrow_forwardA firm buys on terms of 3/15, net 45. It does not take the discount, and it generally pays after 60 days. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year? 36.73% 25.09% 33.39% 27.59% 30.35%arrow_forwardCost of Trade Credit If a firm buys under terms of 1/15, net 45, but actually pays on the 20th day and still takes the discount, what is the nominal cost of its nonfree trade credit? Assume a 365-day year. Do not round intermediate calculations. Round your answer to two decimal places. % Does it receive more or less credit than it would if it paid within 15 days? I. Paying after the discount period, but still taking the discount gives the firm more credit than it would receive if it paid within 15 days. II. Paying after the discount period, but still taking the discount gives the firm less credit than it would receive if it paid within 15 days. III. Paying before the discount period and taking the discount gives the firm more credit than it would receive if it paid within 15 days.arrow_forward
- What is the effective annual percentage cost of its non-free trade credit?arrow_forwardCost of Trade Credit If a firm buys under terms of 1/15, net 60, but actually pays on the 20th day and still takes the discount, what is the nominal cost of its nonfree trade credit? Assume a 365-day year. Do not round intermediate calculations. Round your answer to two decimal places. % Does it receive more or less credit than it would if it paid within 15 days? I. Paying before the discount period and taking the discount gives the firm more credit than it would receive if it paid within 15 days.II. Paying after the discount period, but still taking the discount gives the firm more credit than it would receive if it paid within 15 days.III. Paying after the discount period, but still taking the discount gives the firm less credit than it would receive if it paid within 15 days. -Select-IIIIIIarrow_forwardA firm offers terms of 1/10, net 40. a. What effective annual interest rate does the firm earn when a customer does not take the discount? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b. What effective annual interest rate does the firm earn if the discount is changed to 2 percent? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. c. What effective annual interest rate does the firm earn if the credit period is increased to 60 days? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. d. What effective annual interest rate does the firm earn if the discount period is increased to 15 days? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. a. Effective annual interest rate b. Effective annual interest…arrow_forward
- A company is offred trade credit terms of 3/15, net 30 days. If the firm does not take the discount, and it pays after 50 days. Compute for the effective annual cost of not taking this discount. (Assume a 365 day) a.30.00% b.32.25% c.37.39% d.45.50% e.44.30%arrow_forwardNewsome Inc. buys on terms of 3/15, net 45. It does not take the discount, and it generally pays after 6o days. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?arrow_forwardWhat are the nominal and effective costs of trade credit under the credit terms of 2/20, net 40? Assume a 365-day year. Do not round intermediate calculations. Round your answers to two decimal places. Nominal cost of trade credit: % Effective cost of trade credit: %arrow_forward
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