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

Q38. Free Trade credit means how much credit company is getting for no cost i.e.20 days*$10,000 per day= $200,000

Ans - $200,000

Q39.Average total credit means total credits outstanding at any point of time.

It is not mentioned that company delays any payment and it is also not paying anything earlier than days. That means outstanding credit at any time will be days credit i.e. 50 days*$10,000 = $500,000

Ans - $500,000

Q40 Costly credit means the credit for which company has to pay for i.e. those 30 extra days. Average costly credit is the outstanding credit which is costly for the company. Here 30 days*$10,000 per day = $300,000

And - $300,000

Q41. Nominal Annual Cost means the cost company is paying for those 50 days for which they are getting credit which is 50 days

3% for 50 days, then how much percentage for 365 days.

= 3*365/50 = 21.9% (No option found, may be tricked)

Q42. Effective cost means the cost effectively paid for. Here, if the company was paying in 20 days, they would have been getting 3% off. Hence company is effectively paying for 30 days only.

Similar to previous ques, 3% for 30 days, they how much for 365 days

= 3*365/30 = 36.5%.

(No option again, please check source, or some assumption like companies cost of capital/Risk free rate of return/Opportuniy cost are missing in the question.