Question

38. 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

39. Based on the information from Question 38, what is the average level of the company’s total trade credit?

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

40. Based on the information from Question 38, what is the average level of the company’s costly trade credit?

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

41. Based on the information from Question 38, what is the nominal annual cost of the firm’s costly trade credit?

		28.6%
		29.3%
		33.5%
		37.6%

42. Based on the information from Question 38, what is the effective annual cost of the firm’s costly trade credit?

		35.8%
		37.6%
		39.5%
		44.9%

Answer 1

Question - 38

Daily purchases from the supplier is $ 10000.

Average level of companies free trade credit = discount period * average daily purchases = 20 * 10,000 = $20,0000

Question No - 39

Average level of the company’s total trade credit = credit period * average daily purchases = 50 * 10,000 = $500,000

Question No - 40

average level of the company’s costly trade credit = (credit period - discount period) * average daily purchases = (50 - 20) * 10,000 = $300,000

Question No - 41

Nominal annual cost of the firm’s costly trade credit = [Discount / (1 - Discount) ] * [365 / (credit period - discount period)] = [3 / 97] * [365 / (50-20)] = 37.6289%