What is the difference between free trade credit and costly trade credit? What is theformula for finding the nominal annual cost of trade credit? Does the nominal costof trade credit understate the effective cost? Explain.

What is the difference between free trade credit and costly trade credit? What is theformula for finding the nominal annual cost of trade credit? Does the nominal costof trade credit understate the effective cost? Explain.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter16: Supply Chains And Working Capital Management

Section: Chapter Questions

Problem 8Q

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Question

What is the difference between free trade credit and costly trade credit? What is the
formula for finding the nominal annual cost of trade credit? Does the nominal cost
of trade credit understate the effective cost? Explain.

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The difference between free trade credit and costly trade credit is as follows:

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The formula to calculate the nominal annual cost of trade credit is as follows:

VIEW

Example:

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The reasons on whether the nominal cost of trade credit understate the effective cost is as follows:

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