Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter 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
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
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_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_forwardA 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?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_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_forward
- d. What is the percentage cost of trade credit to customers who do not take the discountand pay in 70 days?e. What would happen to McEwan’s accounts receivable if it toughened up on its collectionpolicy with the result that all nondiscount customers paid on the 30th day?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_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_forward
- 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 45arrow_forwardA firm is offered credit terms of 2/10 net 45 by most of its suppliers. The firm also has a credit line available at a local bank at an interest rate of 12 percent. What is the cost of giving up the cash discount? Should the company take the cash discount or finance the purchase with the line of credit?arrow_forwardBUS 038 : Business Computatns12. For terms of 6/10, n/30, what annual rate do you pay the supplier if you fail to pay the invoice at the end of the discount period?arrow_forward
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