Question

A firm offers terms of 1.8/10, net 30. |

a. |
What effective annual interest rate does the firm earn when a
customer does not take the discount? |

b. |
What effective annual interest rate does the firm earn if the
terms are changed to 2.8/10, net 30, and the customer does not take
the discount? (Use 365 days a year. Do not round
intermediate calculations and enter your answer as a percent
rounded to 2 decimal places, e.g., 32.16.) |

c. |
What effective annual interest rate does the firm earn if the
terms are changed to 1.8/10, net 60, and the customer does not take
the discount? (Use 365 days a year. Do not round
intermediate calculations and enter your answer as a percent
rounded to 2 decimal places, e.g., 32.16.) |

d. |
What effective annual interest rate does the firm earn if the
terms are changed to 1.8/15, net 30, and the customer does not take
the discount? |

Answer #1

Effective Cost of Trade Credit = [1 + (Disc.%/100 - Disc.%)]^[365 / (Days Credit Outstanding – Discount Period)] - 1

a. Effective cost of trade credit = [1 + (1.8/98.2)]^[365 / (30 - 10)] - 1 = 0.3930 or 39.30%

b. Effective cost of trade credit = [1 + (2.8/97.2)]^[365 / (30 - 10)] - 1 = 0.6792 or 67.92%

c. Effective cost of trade credit = [1 + (1.8/98.2)]^[365 / (60 - 10)] - 1 = 0.1418 or 14.18%

d. Effective cost of trade credit = [1 + (1.8/98.2)]^[365 / (30 - 15)] - 1 = 0.5558 or 55.58%

A firm offers terms of 1.4/10, net 60.
a.
What effective annual interest rate does the firm earn when a
customer does not take the discount? (Use 365 days a year.
Do not round intermediate calculations and enter your answer as a
percent rounded to 2 decimal places, e.g., 32.16.)
b.
What effective annual interest rate does the firm earn if the
terms are changed to 2.4/10, net 60, and the customer does not take
the discount? (Use 365...

A firm offers terms of 1/10, net 35.
a. What effective annual interest rate does the firm earn when a
customer does not take the discount? (Do not round intermediate
calculations and enter your answer as a percent rounded to 2
decimal places, e.g., 32.16.)
b. What effective annual interest rate does the firm earn if the
discount is changed to 2 percent? (Do not round intermediate
calculations and enter your answer as a percent rounded to 2
decimal places,...

A firm offers terms of 1/10, net 30.
What effective annual interest rate does the firm earn if the
discount period is increased to 15 days?

A firm offers credit terms of 3/10, net 35. What is the
effective annual rate on the credit extended if a customer foregoes
the discount on a $10,000 purchase? Assume that there are 365 days
in one year. (Do not round intermediate calculations. Round the
final answer to 2 decimal places. Omit the % sign in your response.
For example, an answer of 15.39% should be entered as 15.39.)

Come and Go Bank offers your firm a discount interest
loan with an interest rate of 8 percent for up to $17 million, and
in addition requires you to maintain a 4 percent compensating
balance against the face amount borrowed.
What is the effective annual interest rate on this lending
arrangement? (Do not round intermediate calculations and
enter your answer as a percent rounded to 2 decimal places, e.g.,
32.16.)
Effective annual rate

Your firm purchases goods from its supplier on terms of 1.8
divided by 15, net 30.
a. What is the effective annual cost to your firm if it
chooses not to take the discount and makes its payment on day
30?
The effective annual cost is_----%. (Round to two decimal
places.)
b. What is the effective annual cost to your firm if it
chooses not to take the discount and makes its payment on day
40?
The effective annual cost...

Neveready Flashlights, Inc. needs $410,000 to take a cash
discount of 2/10, net 60. A banker will loan the money for 50 days
at an interest cost of $6,600.
a.
What is the annual rate on the bank loan? (Use 365 days
in a year. Do not round intermediate calculations. Round the final
answer to 2 decimal places.)
Annual rate
%
b.
How much would it cost (in percentage terms) if the firm did not
take the cash discount,...

Cheap Money Bank offers your firm a discount interest
loan at 5 percent for up to $18 million and, in addition, requires
you to maintain a 2 percent compensating balance against the amount
borrowed.
What is the effective annual interest rate on this lending
arrangement? (Do not round intermediate calculations and
enter your answer as a percent rounded to 2 decimal places, e.g.,
32.16.)

A bank offers your firm a revolving credit arrangement for up to
$50 million at an interest rate of 1.25 percent per quarter. The
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percent against the unused portion of the credit line, to
be deposited in a noninterest-bearing account. Assume you have a
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Kyoto Joe, Inc., sells earnings forecasts for Japanese
securities. Its credit terms are 1/15, net 30. Based on experience,
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a.
What is the average collection period for the company?
(Use 365 days a year. Do not round intermediate
calculations and round your answer to 2 deceimal places, e.g.,
32.16.)
b.
If the company sells 1,410 forecasts every month at a price of
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