Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Chapter 26, Problem 5P
Summary Introduction
To determine: The effective annual cost of trade credit.
Introduction:
Trade credit is an offering given by the suppliers to the firm. When supplier agrees to deliver the products and gives a specified time period for the payment, he will tend to give some sort of percentage as a credit discount to the firm, if the payment is made within the specific period.
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Why 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.
If a firm is given a trade credit terms of 2/15, net 30, then the cost to the firm failing to take the discount is (use 360 days)
Assume all suppliers to a large retail chain offer credit terms of 2/10, net 30. The retail chain consistently takes the 2 percent discount and pays in 60 days. When pressed on the issue, the retail chain tells the suppliers they can either accept the payments as they currently are or lose the business. Is this ethical? How might this impact a small supplier versus a large supplier? Explain.
Chapter 26 Solutions
Corporate Finance
Ch. 26.1 - Prob. 1CCCh. 26.1 - How does working capital impact a firms value?Ch. 26.2 - Prob. 1CCCh. 26.2 - Prob. 2CCCh. 26.3 - Prob. 1CCCh. 26.3 - Prob. 2CCCh. 26.4 - What is accounts payable days outstanding?Ch. 26.4 - What are the costs of stretching accounts payable?Ch. 26.5 - What are the benefits and costs of holding...Ch. 26.5 - Prob. 2CC
Ch. 26.6 - Prob. 1CCCh. 26.6 - Prob. 2CCCh. 26 - Prob. 1PCh. 26 - Prob. 2PCh. 26 - Aberdeen Outboard Motors is contemplating building...Ch. 26 - Prob. 4PCh. 26 - Prob. 5PCh. 26 - Prob. 6PCh. 26 - The Fast Reader Company supplies bulletin board...Ch. 26 - Prob. 8PCh. 26 - Prob. 9PCh. 26 - Prob. 10PCh. 26 - The Mighty Power Tool Company has the following...Ch. 26 - What is meant by stretching the accounts payable?Ch. 26 - Prob. 13PCh. 26 - Your firm purchases goods from its supplier on...Ch. 26 - Prob. 15PCh. 26 - Prob. 16PCh. 26 - Which of the following short-term securities would...
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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
- 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? Does it receive more or less credit than it would if it paid within 15 days?arrow_forwardFill in the blank with the correct answerarrow_forwardA supplier hands you an invoice for $47,000 with the terms 4/20, net 180. a. ) What is the effective annual cost (expressed as an APR) if you forgo the discount and pay after 180 days?b. )What is the effective annual cost (expressed as an APR) if you pay after 200 days?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_forwardCredit terms with a new supplier are 2/10, net 30 If unable to pay within the discount period and pay the cash price, what is the Effective Cost of Trade Credit (EFF%) if paid in 20 days? Group of answer choices 87.2449% 74.4898% 105.4367% 109.0491% 76.6667%arrow_forwardProvide solution for this questionarrow_forward
- Q3.arrow_forwardWhen customers purchase goods on account, Spitz Manufacturing offers them a 2% reduction in the amount owed if they pay within 10 days. This is an example of a: Multiple Choice Sales return. Sales discount. Sales allowance. Bad debt.arrow_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
- If a supplier quotes you terms of 1.5% discount for payment of an account within 21 days or net 60 (1.5/21, N60) what is the effective interest rate if you do not pay until 60 days after receipt of the account?arrow_forwardPlease show all equations and work as needed. If possible, please type the work so that it may be copied and pasted. Thank you.arrow_forwardPLEASE SHOW ALL WORK 6. You receive an invoice for $18,300 with terms of 5/15, n/60. If the supplier has a policy of allowing a cash discount for partial payments and you pay $11,500 within the discount period, calculate the amount of credit you will receive for this payment.Amount credited = Amount paidComplement of cash discount rate = $11,500 7. For terms of 8/10, n/60 determine the annual rate you, in effect, pay the supplier if you fail to pay the invoice at the end of the discount period. Express the rate with 2 decimal places. 8. An invoice for $75.20 has terms of 3/10, 1/30, n/60. If you make payment 25 days after the invoice date, what amount should you pay? 9. You purchase goods on an invoice dated July 5 with terms of 4/15, n/45 ROG. If you receive the goods on July 23, calculate(a) the last day of the discount period, and (b) the last day of the credit period.b. Last day of credit period:arrow_forward
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