Question

A company has daily purchases of $10,000 from its supplier. The supplier offers trade credit under the following terms: 3/20, net 50 days. The company finally chooses to pay on time (pay in the 50th day) but not to take the discount. We assume 365 days per year. What is the average level of the company’s free trade credit?

		$30,000
		$170,000
		$200,000
		$300,000

Use above info to answer, what is the average level of the company’s total trade credit?

		$170,000
		$200,000
		$300,000
		$500,000

Use above info to, what is the average level of the company’s costly trade credit?

		$170,000
		$200,000
		$300,000
		$500,000

Use above info to, what is the nominal annual cost of the firm’s costly trade credit?

		28.6%
		29.3%
		33.5%
		37.6%

Use the above info to, what is the effective annual cost of the firm’s costly trade credit?

		35.8%
		37.6%
		39.5%
		44.9%

Answer 1

1]	Average level of free trade credit =10000*20	$             200,000
2]	Average level of total trade credit = 10000*50 =	$             500,000
3]	Average level of costly trade credit = 500000-200000 =	$             300,000
4]	Nominal cost of costly trade credit = (3/97)*(365/30) =	37.6%
5]	EAC of costly trade credit = (1+397)^(365/30)-1 =	44.9%