Answered: Assume the credit terms offered to your…

Assume the credit terms offered to your firm by your suppliers are 4/15, net 30. Calculate the cost of the trade credit if your firm does not take the discount and pays on day 30

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter21: Supply Chains And Working Capital Management

Section: Chapter Questions

Problem 3P: What are the nominal and effective costs of trade credit under the credit terms of 3/15, net 30?

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Concept explainers

Trade Credit

Answer- a- Before Shipping of goods

Question

Assume the credit terms offered to your firm by your suppliers are

4/15,

net

30.

Calculate the cost of the trade credit if your firm does not take the discount and pays on day

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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.)
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'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 above
Differentiate between free and costly trade credit.What is the formula for determining the nominalannual interest rate associated with a credit policy?What is the formula for the effective annual interestrate? How would these cost rates be affected if afirm buying on credit could “stretch” either the discount days or the net payment days—that is, takediscounts on payments made after the discountperiod or else pay later than the stated paymentdate?
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)
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?
What is the difference between free trade credit and costly trade credit? What is theformula for finding the nominal annual cost of trade credit? Does the nominal costof trade credit understate the effective cost? Explain.
If a firm's supplier has a 3/10/60 credit policy, the cost of trade credit per period is equal to a. 3.09% b. 22.58% c. 3% d. 97% e. None of the above
6. The purchasing document should also specify when payment is due. This is usually expressed as a net number of days, such as Net 30 or Net 45. A discount period may be included where the supplier specifies the amount of the discount as well as the number of days the buyer can make payments and still earn the discount. The discount period is often expressed as a formula: 2/20 Net 45
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%
Calculate the nominal annual cost of nonfree trade credit under each of the following terms. Assume that payment is made either on the discount date or on the due date. 2/15, net 20 1/10, net 45 3/15, net 45 2/ 10, net 50 2/15, net 35
A firm is offered trade credit terms of 3/15, net 45 days. The firm does not take the discount, and it pays after 67 days. What is the nominal annual cost of not taking the discount?