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In: Finance
16. Cost of trade credit Firms usually offer their customers some form of trade credit. This...
16. 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:
Free Spirit Industries Inc. buys on terms of 2.5/15, net 45 from its chief supplier.
If Free Spirit receives an invoice for $1,545.78, what would be the true price of this invoice?
$2,110.00
$1,281.07
$1,507.14
$1,582.50
The nominal annual cost of the trade credit extended by the supplier is ____________ . (Note: Assume there are 365 days in a year.)
The effective annual rate of interest on trade credit is ______________
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 supplier on the 50th day after the sale. As a result, Free Spirit can decrease its nominal cost of trade credit by___________% by paying late.
Solutions
jeff jeffy answered 1 month agoRelated Solutions
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.
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:Tasty Tuna Corporation buys on terms of 2.5/15, net 60 from its
chief supplier.If Tasty Tuna receives an invoice for $1,545.78, what would be
the true price of this invoice?$1,356.43$1,205.71$1,130.36$1,507.14The nominal annual cost of the trade credit extended by the
supplier is . (Note: Assume...
Problem 16-07 Cost of Trade Credit Calculate the nominal annual cost of nonfree trade credit under...
Problem 16-07
Cost of Trade Credit
Calculate the nominal annual cost of nonfree trade credit under
each of the following terms. Assume that payment is made either on
the due date or on the discount date. Assume 365 days in year for
your calculations. Do not round intermediate calculations.
1/15, net 25. Round your answer to two decimal places.
%
2/10, net 55. Round your answer to two decimal places.
%
3/10, net 55. Round your answer to two decimal...
Problem 16-03 Cost of Trade Credit What are the nominal and effective costs of trade credit...
Problem 16-03
Cost of Trade Credit
What are the nominal and effective costs of trade credit under
the credit terms of 1/20, net 40? Assume 365 days in a year for
your calculations. Round your answers to two decimal places. Do not
round intermediate calculations.
Nominal cost of trade credit
%
Effective cost of trade credit
%
Problem 16-04
Cost of Trade Credit
A large retailer obtains merchandise under the credit terms of
2/15, net 40, but routinely takes 65...
Explain the trade credit facility provided by some companies to their customers that allow them to...
Explain the trade credit facility provided by some companies to
their customers that allow them to manage their day-to-day
liquidity situation and calculate the opportunity cost of an
invoice that specifies the following conditions, as shown below (a.
– c.): a) conditions: 1.25/10, n/30. b) conditions: 1.25/10, n/60.
c) conditions: 1.5/10, n/60
Problem 16-04 Cost of Trade Credit A large retailer obtains merchandise under the credit terms of...
Problem 16-04
Cost of Trade Credit
A large retailer obtains merchandise under the credit terms of
3/20, net 45, 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 365 days in year for your
calculations. Do not round intermediate calculations. Round your
answer to two decimal places.
%?
Problem 16-04 Cost of Trade Credit A large retailer obtains merchandise under the credit terms of...
Problem 16-04
Cost of Trade Credit
A large retailer obtains merchandise under the credit terms of
2/15, 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 365 days in year for your
calculations. Do not round intermediate calculations. Round your
answer to two decimal places.
Proposal #1 would extend trade credit to some customers that previously have been denied credit because...
Proposal #1 would extend trade credit to some customers
that previously have been denied credit because they were
considered poor risks. Sales are projected to
increase by $200,000 per year if credit is extended to these new
customers. Of the new accounts receivable generated, 6%
are projected to be uncollectible. Additional collection
costs are projected to be 5% of incremental sales, and production
and selling costs are projected to be 78% of sales. Your
firm expects to pay a total of 30% of its...
Proposal #1 would extend trade credit to some customers that previously have been denied credit because...
Proposal #1 would extend trade credit to some customers
that previously have been denied credit because they were
considered poor risks. Sales are projected to increase
by $200,000 per year if credit is extended to these new customers.
Of the new accounts receivable generated, 6% are projected to be
uncollectible. Additional collection costs are projected to be 5%
of incremental sales, and production and selling costs are
projected to be 78% of sales. Your firm expects to pay a total...
Proposal #1 would extend trade credit to some customers that previously have been denied credit because...
Proposal #1 would extend trade credit to some customers
that previously have been denied credit because they were
considered poor risks. Sales are projected to increase
by $200,000 per year if credit is extended to these new customers.
Of the new accounts receivable generated, 6% are projected to be
uncollectible. Additional collection costs are projected to be 5%
of incremental sales, and production and selling costs are
projected to be 78% of sales. Your firm expects to pay a total...
Proposal #1 would extend trade credit to some customers that previously have been denied credit because...
Proposal #1 would extend trade credit to some customers that
previously have been denied credit because they were considered
poor risks. Sales are projected to increase by $150,000 per year if
credit is extended to these new customers. Of the new accounts
receivable generated, 7% are projected to be uncollectible.
Additional collection costs are projected to be 3% of incremental
sales (whether they actually end up collected or not), and
production and selling costs are projected to be 80% of...
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