Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Chapter 16, Problem 4P
Summary Introduction
To determine: Effective cost of trade credit.
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A large retailer obtains merchandise under the credit terms of 1/10, net 30, but routinely takes 60 dyas to pay its bills.(Because the retailer is an important customer, suppliers allow the firsm to stretch its credit terms.) What is the retailers effective cost of trade credit?
Cost 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.
A large retailer obtains merchandise under the credit terms of 3/10, net 45, but routinely takes 60 days to pay its bills. (Because the retailer is an important customer, suppliers allow the firm to stretch its credit terms.) What is the retailer's effective cost of trade credit? Assume a 365-day year. Do not round intermediate calculations. Round your answer to two decimal places.
Chapter 16 Solutions
Financial Management: Theory & Practice
Ch. 16 - Define each of the following terms:
Working...Ch. 16 - What are the two principal reasons for holding...Ch. 16 - Prob. 3QCh. 16 - Prob. 4QCh. 16 - Prob. 5QCh. 16 - Prob. 6QCh. 16 - Prob. 7QCh. 16 - Prob. 8QCh. 16 - What kinds of firms use commercial paper?
Ch. 16 - Prob. 1P
Ch. 16 - Medwig Corporation has a DSO of 17 days. The...Ch. 16 - What are the nominal and effective costs of trade...Ch. 16 - Prob. 4PCh. 16 - Prob. 5PCh. 16 - Snider Industries sells on terms of 2/10, net 45....Ch. 16 - Calculate the nominal annual cost of trade credit...Ch. 16 - Captain Whitman Ship Supplies offers terms of...Ch. 16 - Grunewald Industries sells on terms of 2/10, net...Ch. 16 - The D.J. Masson Corporation needs to raise...Ch. 16 - Negus Enterprises has an inventory conversion...Ch. 16 - Prob. 12PCh. 16 - Payne Products had 1.6 million in sales revenues...Ch. 16 - Dorothy Koehl recently leased space in the...Ch. 16 - Prob. 15PCh. 16 - Prob. 16PCh. 16 - The Raattama Corporation had sales of 3.5 million...Ch. 16 - Start with the partial model in the file Ch16 P18...Ch. 16 - Prob. 1MCCh. 16 - Prob. 2MCCh. 16 - Prob. 3MCCh. 16 - Is there any reason to think that RR may be...Ch. 16 - Prob. 5MCCh. 16 - Johnson knows that RR sells on the same credit...Ch. 16 - Prob. 7MCCh. 16 - Prob. 8MCCh. 16 - What is the impact of higher levels of accruals,...Ch. 16 - Assume that RR purchases $200,000 (net of...Ch. 16 - Prob. 11MCCh. 16 - Prob. 12MCCh. 16 - Prob. 13MCCh. 16 - Prob. 14MCCh. 16 - Prob. 15MCCh. 16 - In an attempt to better understand RR’s cash...
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- Your firm purchases goods from its supplier on terms of 2.3/14, net 40. a. What is the effective annual cost to your firm if it chooses not to take the discount and makes its payment on day 40?. (Round to one decimal place.) b. What is the effective annual cost to your firm if it chooses not to take the discount and makes its payment on day 50? (Round to one decimal place.)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_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
- A large retailer obtains merchandise under the credit terms of 3/10, net 30, but routinely takes 50 days to pay its bills. (Because the retailer is an important customer, suppliers allow the firm to stretch its credit terms.) What is the retailer's effective cost of trade credit? Assume a 365-day year. Do not round intermediate calculations. Round your answer to two decimal places. Don't use Excelarrow_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 4/10, net 45 from its chief supplier. A. If Tasty Tuna receives an invoice for $856.75, 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.) $822.48 $575.74 $699.11 $616.86 B. 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.) C. 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 50th 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, 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 1/20, net 60 from its chief supplier. If Tasty Tuna 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.) $1,553.04 $1,242.43 $1,056.07 O $931.82 The nominal annual cost of the trade credit extended by the supplier is calculations to four decimal places, and your final answer to two decimal places.) , assuming a 365-day year. (Note: Round all intermediate 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 65th day after the sale. As a result, Tasty Tuna can decrease its nominal cost of trade…arrow_forward
- Firms 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_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 will affect the actual cost of asset being sold for the buyer and the seller. Consider this case: Green Moose Industries buys most of its raw materials from a single supplier. This supplier sells to Green Moose on terms of 1/10, net 30. The cost per period of the trade credit extended to Green Moose is ________(1.23%, 0.89%, 1.01%, 1.05%) (Note: Round all intermediate calculations to four decimal places, and your final answer to two decimal places.). Green Moose’s trade credit has a nominal annual cost of _______ (22.85%, 19.17%, 16.59%, 18.43%) , assuming a 365-day year. (Note: Round all intermediate calculations to four decimal places, and your final answer to two decimal places.) If Green Moose Industries’s supplier shortens its discount period to five days, this will _______ (Increase, Decrease) the cost of the trade credit.arrow_forward
- 8. Cost of trade credit Firms 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: Green Moose Industries buys most of its raw materials from a single supplier. This supplier sells to Green Moose on terms of 4/15, net 30. The cost per period of the trade credit extended to Green Moose, rounded to two decimal places, is 4.17% Green Moose's trade credit has a nominal annual cost of decimal places, and your final answer to two decimal places.) The effective annual rate (EAR) of the supplier's trade credit is , assuming a 365-day year. (Note: Round all intermediate calculations to four If Green Moose Industries's supplier shortens its discount period to five days, this will increase the cost of the trade credit.arrow_forwardBob's Product Company takes 20 days to convert its raw materials to finished goods, 15 days to sell it, and 25 days to collect its credit sales. What is the company’s days receivable period? Group of answer choices 60 35 25 10 15 A bank letter of credit, sometimes called a standby letter of credit, is a written promise by a bank that it will make a payment on behalf of the customer. This is different than a line of credit, which is a akin to a credit card….a line of credit allows the company to borrow funds as needed to pay any bills. A LETTER of credit is specific to the party that the company might owe money to. Group of answer choices True Falsearrow_forwardA customer pays on credit for $1,250 worth of merchandise, terms 4/15, n/30. If the customer pays within the discount window, how much will they remit in cash to the retailer? Assume the perpetual inventory system is used.arrow_forward
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