A firm is offered trade credit terms of 3/15, net 30 days. The firm does not take the discount, and it pays after 50 days. (Assume a 365-day year.) Questions: - How many days are there per period? - What is the effective annual cost of not taking this discount? - The number of compounding period is ___.

A firm is offered trade credit terms of 3/15, net 30 days. The firm does not take the discount, and it pays after 50 days. (Assume a 365-day year.) Questions: - How many days are there per period? - What is the effective annual cost of not taking this discount? - The number of compounding period is ___.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter18: The Management Of Accounts Receivable And Inventories

Section: Chapter Questions

Problem 10QTD

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Now assume that it is several years later. The brothers are concerned about the firm’s current credit terms of net 30, which means that contractors buying building products from the firm are not offered a discount and are supposed to pay the full amount in 30 days. Gross sales are now running $1,000,000 a year, and 80% (by dollar volume) of the firm’s paying customers generally pay the full amount on Day 30; the other 20% pay, on average, on Day 40. Of the firm’s gross sales, 2% ends up as bad-debt losses. The brothers are now considering a change in the firm’s credit policy. The change would entail: (1) changing the credit terms to 2/10, net 20, (2) employing stricter credit standards before granting credit, and (3) enforcing collections with greater vigor than in the past. Thus, cash customers and those paying within 10 days would receive a 2% discount, but all others would have to pay the full amount after only 20 days. The brothers believe the discount would both attract additional customers and encourage some existing customers to purchase more from the firm—after all, the discount amounts to a price reduction. Of course, these customers would take the discount and hence would pay in only 10 days. The net expected result is for sales to increase to $1,100,000; for 60% of the paying customers to take the discount and pay on the 10th day; for 30% to pay the full amount on Day 20; for 10% to pay late on Day 30; and for bad-debt losses to fall from 2% to 1% of gross sales. The firm’s operating cost ratio will remain unchanged at 75%, and its cost of carrying receivables will remain unchanged at 12%. To begin the analysis, describe the four variables that make up a firm’s credit policy and explain how each of them affects sales and collections.
Del Hawley, owner of Hawleys Hardware, is negotiating with First City Bank for a 1-year loan of 50,000. First City has offered Hawley the alternatives listed here. Calculate the effective annual interest rate for each alternative. Which alternative has the lowest effective annual interest rate? a. A 12% annual rate on a simple interest loan, with no compensating balance required and interest due at the end of the year b. A 9% annual rate on a simple interest loan, with a 20% compensating balance required and interest due at the end of the year c. An 8.75% annual rate on a discounted loan, with a 15% compensating balance d. Interest figured as 8% of the 50,000 amount, payable at the end of the year, but with the loan amount repayable in monthly installments during the year
A firm is offered trade credit terms of 3/15, net 30 days. The firm does not take the discount, and it pays after 50 days. (Assume a 365-day year) a. What is the effective annual cost of not taking this discount? b. How many days are there per period? c. How much is the rate per period? d. The number of compounding period is_? e. What is the annual nominal rate of not taking this discount?
A firm is offered trade credit terms of 3/15, net 30 days. The firm does not take the discount, and it pays after 50 days. What is the effective annual cost of not taking this discount? (Assume a 365-day year.)
A firm is offered trade credit terms of 3/15, net 30 days. The firm does not take the discount, and it pays after 50 days. Questions: - What is the annual nominal rate of not taking this discount? - How much is the rate per period?
A firm is offered trade credit terms of 3/15, net 45 days. The firm does not take the discount, and it pays after 67 days. What is the nominal annual cost of not taking the discount? (Assume a 365-day year.) Show your completesolution.
A firm is offered trade credit terms of 3/15, net 30 days. The firm does not take the discount, and it pays after 50 days. (Assume a 365-day year.) Questions: - What is the annual nominal rate of not taking this discount? - How much is the rate per period?
A firm is offered trade credit terms of 3/15, net 30 days. The firm does not take the discount, and it pays after 50 days. (Assume a 365-day year.) A. The number of compounding period is ___. B. How much is the rate per period? C. How many days are there per period? D. What is the annual nominal rate of not taking this discount?
A firm is offered trade credit terms of 3/15, net 30 days. The firm does not take the discount, and it pays after 50 days. (Assume a 365-day year.) How much is the rate per period? The number of compounding period is ___ How many days are there per period
A firm is offered trade credit terms of 3/15, net 45 days. The firm does not take the discount, and it pays after 67 days. What is the nominal annual cost of not taking the discount?
A firm is offered trade credit terms of 3/15, net 30 days. The firm does not take the discount, and it pays after 50 days. (Assume a 365-day year.) 1. What is the annual nominal rate of not taking this discount? * 2. The number of compounding period is ___. *
If a firm buys under terms of 1/15, net 40, but actually pays on the 20th day and still takes the discount, what is the nominal cost of its nonfree trade credit? Assume a 365-day year. Do not round intermediate calculations. Round your answer to two decimal places.