Random 390 questions
The D.J. Masson Corporation needs to raise $300,000 for 1 year to supply working capital to a new store. Masson buys from its suppliers on terms of 2/10, net 70, and it currently pays on the 10th day and takes discounts. However, it could forgo the discounts, pay on the 70th day, and thereby obtain the needed $300,000 in the form of costly trade credit. What is the effective annual interest rate of this trade credit? Assume a 365-day year.
Accounts payable: Nominal cost = (2/98)(365/60) = (0.0204)(6.0833) = 12.41% EAR cost = (1.0204)^6.0833 - 1 = 13.08%
A large retailer obtains merchandise under the credit terms of 1/10, 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 a 365-day year.
Effective cost of trade credit = (1+1/99)^365/40 - 1.0 = 9.60%
Grunewald Industries sells on terms of 3/10, net 50. Gross sales last year were $4,015,000 and accounts receivable averaged $432,500. Half of Grunewald's customers paid on the 10th day and took discounts. What are the nominal and effective costs of trade credit to Grunewald's nondiscount customers? (Hint: Calculate daily sales based on a 365-day year, calculate the average receivables for discount customers, and then find the DSO for the nondiscount customers.)
Sales per day = $4,015,000/365 = $11,000 Sales per day for half customers = 0.5($11,000) = $5,500 A/R attributable to discount customers = $5,500(10) = $55,000 A/R attributable to nondiscount customers: Total A/R$432,500Discount customers' A/R55,000Nondiscount customers' A/R$377,500 Days sales outstanding nondiscount customers = (A/R)/Sales per day = $377,500/$5,500 = 68.64 days Alternatively, DSO = $432,500/$11,000 = 39.32 days 39.32 = 0.5(10) + 0.5(DSO Nondiscount) DSO Nondiscount = 34.32/0.5 = 68.64 days Thus, although nondiscount customers are supposed to pay within 50 days, they are actually paying, on average, in 68.64 days. Cost of trade credit to nondiscount customers equals the rate of return to the firm: Nominal rate = (3/97) × (365/(68.64 - 10)) = 0.0309(6.22) = 19.25% Effective cost = (1 + 3/97)^365/58.64 - 1 = 20.88%
The Thompson Corporation projects an increase in sales from $2 million to $2.5 million, but it needs an additional $250,000 of current assets to support this expansion. Thompson can finance the expansion by no longer taking discounts, thus increasing accounts payable. Thompson purchases under terms of 2/10, net 30, but it can delay payment for an additional 20 days - paying in 50 days and thus becoming 20 days past due - without a penalty because its suppliers currently have excess capacity. What is the effective, or equivalent, annual cost of the trade credit? Assume a 365-day year.
Terms: 2/10, net 30. But the firm plans delaying payments 20 additional days, which is the equivalent of 2/10, net 50. Nominal cost = (Discount percent/(100-Discount percent)) × (365/(Days credit is outstanding - Discount period)) = (2/(100-2)) × (365/(50 - 10)) = (2/98) × (365/40) = 18.62% Effective cost = (1 + 2/98)^365/40 - 1 = 20.24%
