EBK CORPORATE FINANCE
4th Edition
ISBN: 9780134202778
Author: DeMarzo
Publisher: PEARSON CUSTOM PUB.(CONSIGNMENT)
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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)
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.
Chapter 26 Solutions
EBK CORPORATE FINANCE
Ch. 26.1 - What is the firms cash cycle? How does it differ...Ch. 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 - Use the financial statements supplied on the next...Ch. 26 - Prob. 16PCh. 26 - Which of the following short-term securities would...
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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_forwardCost of trade credit Firms 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: Blue Elk Manufacturing buys most of its raw materials from a single supplier. This supplier sells to Blue Elk on terms of 2/15, net 45. The cost per period of the trade credit extended to Blue Elk, rounded to two decimal places, is___________% Blue Elk’s trade credit has a nominal annual cost—expressed as an annual percentage rate (APR)—of_________%, assuming a 365-day year. (Note: Round all intermediate calculations to four decimal places, and your final answer to two decimal places.) If Blue Elk’s supplier shortens the discount period by five days, this will _____________(Increase or decrease pick one) the cost of the trade credit.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_forward
- 6. Your firm decides to tighten its credit policy so that customers pay in 30 days rather than 45 days. Assuming no other changes, this action will decrease the firm's: A Trade payables period. B Inventory holding period. C Trade receivables collection period. D None of above.arrow_forwardIf 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_forward
- Firms 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_forwardA 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_forwardWhich of the following refers to the ability of a firm to buy repeatedly from a supplier on trade credit without re-applying for credit? Select one: a. Net terms b. Cash discount c. Open account d. Present value of delayed paymentarrow_forward
- Credit 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_forwardWhen the company ships a product to a customer on credit, it risks loosing the Cost of Goods Sold if the customer does not pay in 30 days or less. True or Falsearrow_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: Free Spirit Industries Inc. buys on terms of 1/20, net 45 from its chief supplier. If Free Spirit receives an invoice for $1,254.98, 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.) O $1,304.55 $1,056.07 $1,242.43 O $1,118.19 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 Free Spirit does not take advantage of the discount and then chooses to pay its supplier late-so that on average, Free Spirit will pay its by paying late. (Note: supplier on the 50th day after the sale. As a result, Free Spirit can…arrow_forward
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