Why is some trade credit called free while other credit is called costly? If a firm buys on terms of2/10, net 30, pays at the end of the 30th day, and typically shows $300,000 of accounts payableon its balance sheet, would the entire $300,000 be free credit, would it be costly credit, or wouldsome be free and some costly? Explain your answer. No calculations are necessary.

Why is some trade credit called free while other credit is called costly? If a firm buys on terms of2/10, net 30, pays at the end of the 30th day, and typically shows $300,000 of accounts payableon its balance sheet, would the entire $300,000 be free credit, would it be costly credit, or wouldsome be free and some costly? Explain your answer. No calculations are necessary.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter21: Supply Chains And Working Capital Management

Section: Chapter Questions

Problem 8P: If a firm buys on terms of 3/15, net 45, but actually pays on the 20th day and still takes the...

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If a firm buys on terms of 3/15, net 45, but actually pays on the 20th day and still takes the discount, what is the nominal cost of its nonfree trade credit? Does it receive more or less credit than it would if it paid within 15 days?
Suppose a firm makes purchases of $3.65 million per year under terms of 2/10, net 30, and takes discounts. What is the average amount of accounts payable net of discounts? (Assume the $3.65 million of purchases is net of discounts—that is, gross purchases are $3,724,489.80, discounts are $74,489.80, and net purchases are $3.65 million.) Is there a cost of the trade credit the firm uses? If the firm did not take discounts but did pay on the due date, what would be its average payables and the cost of this nonfree trade credit? What would be the firm’s cost of not taking discounts if it could stretch its payments to 40 days?
Tightening Credit Terms Kim Mitchell, the new credit manager of the Vinson Corporation, was alarmed to find that Vinson sells on credit terms of net 90 days while industry-wide credit terms have recently been lowered to net 30 days. On annual credit sales of 2.5 million, Vinson currently averages 95 days of sales in accounts receivable. Mitchell estimates that tightening the credit terms to 30 days would reduce annual sales to 2,375,000, but accounts receivable would drop to 35 days of sales and the savings on investment in them should more than overcome any loss in profit. Vinsons variable cost ratio is 85%, and taxes are 40%. If the interest rate on funds invested in receivables is 18%, should the change in credit terms be made?
A firm buys on terms of 2/10, net 30, but generally does not pay until 40 days after the invoice date. Its purchases totaled $1,095,000 per year. How much “non-free” trade credit does the firm use on average each year? What is the nominal cost of “non-free” trade credit? What is the effective cost rate of the costly credit?
Assume the credit terms offered to your firm by your suppliers are 4/15, net 30. Calculate the cost of the trade credit if your firm does not take the discount and pays on day 30
McGriff Dog Food Company normally takes 28 days to pay for average daily credit purchases of $9,540. Its average daily sales are $10,710, and it collects accounts in 32 days.a. What is its net credit position? b-1. If the firm extends its average payment period from 28 days to 38 days (and all else remains the same), what is the firm's new net credit position? (Negative amount should be indicated by a minus sign.)
d. What is the percentage cost of trade credit to customers who do not take the discountand pay in 70 days?e. What would happen to McEwan’s accounts receivable if it toughened up on its collectionpolicy with the result that all nondiscount customers paid on the 30th day?
You prefer to extend credit on the assumption that you will be paid in fullwithin 30 days of the sales. Firm X has average inventory of $600,000 with all cash sales (no credit sales) of $6,000,000. If you extend credit to this firm, can you expect to be paid on time?
Assume the credit terms offered to your firm by your suppliers are 2/20, net 40. Calculate the cost of the trade credit if your firm does not take the discount and pays on day 40. (Hint: Use a 365-day year.)
Company A is currently cash-constrained, and must make a decision about whether to delay paying one of its suppliers, or taking out a loan. They owe the supplier $12,245, and they can borrow the money from Bank B, which has offered to lend the firm $12,245 for 1 months at an APR of 13% (compounded). The loan has a 1.54% loan origination fee. What would be the cost for Company A if they decide to borrow from Bank B?
Choose the letter of answer and provide solution A firm has total annual sales (all credit) of P25,000.00 and accounts receivable of P8,000.00. How rapidly (in how many days) must accounts receivable be collected if management wants to reduce the accounts receivable to P6,000.00? *a. 87.6 daysb. 97.6 daysc. 107.6 daysd. 102.5 dayse. 105.8 days
Sway Tailors currently has credit terms of net 30, an average collection period of 29 days, and average receivables of $211,410. The firm estimates that if it offered terms of 2/10, net 30 that 45 percent of its customers would pay on Day 10 with the remainder paying on average in 32 days. How much cash could the company free up from its accounts receivables if it switched its credit policy? Multiple Choice O $65,009 O $38,762 $58,336 ↓y