EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103164535
Author: DeMarzo
Publisher: PEARSON
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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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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.)
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)
Chapter 26 Solutions
EBK CORPORATE FINANCE
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- 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_forwardIf your supplier offers 3/5 net 28, what is the implied interestrate if you choose to forgo the discount and pay on day 28?arrow_forwardAssume 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.arrow_forward
- Fill in the blank with the correct answerarrow_forward2.-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.arrow_forwardFirms usually offer their customers some form of trade credit. This allowance comes with certain terms of credit, which affect the cost of asset of sale for the buyer as well as the seller. Consider this case: Purple Turtle Group buys on terms of 3/10, net 30 from its chief supplier. If Purple Turtle receives an invoice for $856.75, what would be the true price of this invoice? $1,163.47 $1,038.81 $706.39 $831.05 The nominal annual cost of the trade credit extended by the supplier is (Note: Assume there are 365 days in a year.) The effective annual rate of interest on trade credit is Suppose Purple Turtle does not take advantage of the discount and then chooses to pay its supplier late-so that on average, Purple Turtle will pay its supplier on the 35th day after the sale. As a result, Purple Turtle can decrease its nominal cost of trade credit by % by paying late.arrow_forward
- . A buyer does not take advantage of a supplier's credit terms of 2/10, n/30 but pays in full at the 30th day; by not taking the discount the buyer loses the equivalent of how much annual interest (stated as a percentage) on the amount of the purchase. Show your calculations.arrow_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- Suppose the suppliers of your firm offered you credit terms of 2/10 net 30 days. Your firm is not taking discounts, but is paying after 25 days instead of waiting until Day 30. You point out that the nominal cost of not taking the discount and paying on Day 30 is approximately 37%. But since your firm is neither taking discounts nor paying on the due date, what is the effective annual percentage cost (not the nominal cost) of its costly trade credit, using a 365-day year? A. 63.5% B. 66.7% C. 70.0% D. 60.3%arrow_forward
- If a firm's supplier has a credit policy of 1/10/45, what is the nominal cost of trade credit? a. 1% b. 99% c. 10.83% d. 11.05% e. None of the abovearrow_forwardFirms usually offer their customers some form of trade credit. This allowance comes with certain terms of credit, which affect the cost of asset of sale for the buyer as well as the seller. Consider this case: Tasty Tuna Corporation buys on terms of 1/10, net 30 from its chief supplier. If Tasty Tuna receives an invoice for $1,545.78, what would be the true price of this invoice? (Note: Round all intermediate calculations to four decimal places, and your final answer to two decimal places.) $1,912.90 $1,377.29 $1,530.32 $1,071.22 The nominal annual cost of the trade credit extended by the supplier is , assuming a 365-day year. (Note: Round all intermediate calculations to four decimal places, and your final answer to two decimal places.) Suppose Tasty Tuna does not take advantage of the discount and then chooses to pay its supplier late—so that on average, Tasty Tuna will pay its supplier on the 35th day after the sale. As a result,…arrow_forwardFirms usually offer their customers some form of trade credit. This allowance comes with certain terms of credit. These terms will affect the cost of the asset for both the buyer and the seller. Consider the following case: Tasty Tuna Corporation buys on terms of 3/15, net 45 from its principal supplier. If Tasty Tuna receives an invoice for $856.75, then the true price of this invoice is . The supplier is willing to extend credit that exhibits a nominal annual cost of . Suppose Tasty Tuna doesn’t take the discount and instead chooses to pay its supplier five days' late—so that on average, Tasty Tuna will pay its supplier on the 50th day after the date of sale. As a result, Tasty Tuna can decrease its actual nominal cost of trade credit by by paying late.arrow_forward
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