Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 26, Problem 14P
Your firm purchases goods from its supplier on terms of 3/15, Net 40.
- a. What is the effective annual cost to your firm if it chooses not to take the discount and makes its payment on day 40?
- b. What is the effective annual cost to your firm if it chooses not to take the discount and makes its payment on day 50?
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Suppose the credit terms offered to your firm by your suppliers are 2/10, net 30 days. Out of convenience, your firm is not taking discounts, but is paying after 20 days, instead of waiting until Day 30. You point out that the nominal cost of not taking the discount and paying on Day 30 is approximately 37 percent. But since your firm is not taking discounts and is paying on Day 20, what is the effective annual cost of your firm’s current practice, using a 365-day year?
Assume that RR purchases $200,000 (net of discounts) of materials on terms of 1/10, net 30, butthat it can get away with paying on the 40th dayif it chooses not to take discounts. How much freetrade credit can the company get from its equipment supplier, how much costly trade credit can itget, and what is the nominal annual interest rateof the costly credit? Should RR take discounts?
Suppose the credit terms offered to your firm by your suppliers are 2/10, net 30 days. Out of convenience, your firm is not taking discounts, but is paying after 20 days, instead of waiting until Day 30. You point out that the nominal cost of not taking the discount and paying on Day 30 is around 37 percent. But since your firm is not taking discounts and is paying on Day 20, what is the effective annual cost of your firm’s current practice, using a 360-day year?
Chapter 26 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 26.1 - What is the firms cash cycle? How does it differ...Ch. 26.1 - How does working capital impact a firms value?Ch. 26.2 - Prob. 1CCCh. 26.2 - Prob. 2CCCh. 26.3 - Prob. 1CCCh. 26.3 - Prob. 2CCCh. 26.4 - What is accounts payable days outstanding?Ch. 26.4 - What are the costs of stretching accounts payable?Ch. 26.5 - What are the benefits and costs of holding...Ch. 26.5 - Prob. 2CC
Ch. 26.6 - Prob. 1CCCh. 26.6 - Prob. 2CCCh. 26 - Prob. 1PCh. 26 - Prob. 2PCh. 26 - Aberdeen Outboard Motors is contemplating building...Ch. 26 - Prob. 4PCh. 26 - Prob. 5PCh. 26 - Prob. 6PCh. 26 - The Fast Reader Company supplies bulletin board...Ch. 26 - Prob. 8PCh. 26 - Prob. 9PCh. 26 - Prob. 10PCh. 26 - The Mighty Power Tool Company has the following...Ch. 26 - What is meant by stretching the accounts payable?Ch. 26 - Prob. 13PCh. 26 - Your firm purchases goods from its supplier on...Ch. 26 - Use the financial statements supplied on the next...Ch. 26 - Prob. 16PCh. 26 - Which of the following short-term securities would...
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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?arrow_forwardCaptain Whitman Ship Supplies offers terms of 3/15, net 45. If a purchaser takes the discount and pays on the 10th day, what is the nominal cost of trade credit? Now suppose a purchaser actually pays on the 20th day but still takes the discount. What is the actual nominal cost of the trade credit?arrow_forwardSuppose 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?arrow_forward
- # You can buy a product from one of three companies. Company A for $3,200 with a trade discount of 30%, Company B for $2,900 with a trade discount of 20% and 10%, or Company C for $3,450 with a trade discount of 20%, 15%, 5%. Which company has the lowest net price?arrow_forwardMahrouq Technologies buys $14,962,649 of materials (net of discounts) on terms of 5/30, net 60, and it currently pays within 30 days and takes discounts. Mahrouq plans to expand, and this will require additional financing. If Mahrouq decides to forego discounts and thus to obtain additional credit from its suppliers, calculate the nominal cost of that credit. Answer in % terms to 2 decimal places (no % sign).arrow_forwardAssume that a merchandiser purchases a product from a supplier for $3.00 per unit and then sells it to customers for $5.00 per unit. Ordinarily, the company sell 30,000 units per year; however, it is considering lowering its price to $4.50 per unit. At the lower price, the company expects to sell 49,250 units per year. What total contribution margin will the company earn if it sells 49,250 units at a price of $4.50 per unit? Multiple Choice $69,400 $73,875 $64,025 $83,725arrow_forward
- RAF has four possible suppliers, all of which offer different credit terms. Except for the differences in credit terms, their products and services are virtually identical. The credit terms offered by these suppliers are shown in the following table. (Note: Assume a 365-day year.) Supplier Credit terms J 1/10 net 30 EOM K 2/20 net 80 EOM L 1/20 net 60 EOM M 3/10 net 55 EOM Calculate the approximate cost of giving up the cash discount from each supplier. If the firm needs short-term funds, which are currently available from its commercial bank at 16%, and if each of the suppliers is viewed separately, which, if any, of the suppliers’ cash discounts should the firm give up? Explain why.arrow_forwardAnselmo’s Engineering buys circuit boards with a list price of $32,000. If the supplier extends trade discounts of 42/32/12, what is the trade discount amount?arrow_forwardPrairie Manufacturing has four possible suppliers, all of which offer different credit terms. Except for the differences in credit terms, their products and services are virtually identical. The credit terms offered by these suppliers are shown in the following table: LOADING... (Note: Assume a 365-day year.) Supplier Credit terms J 2/15 net 40 EOM K 2/20 net 80 EOM L 1/10 net 60 EOM M 3/10 net 100 EOM a. Calculate the approximate cost of giving up the cash discount from each supplier. b. If the firm needs short-term funds, which are currently available from its commercial bank at 10%, and if each of the suppliers is viewed separately, which, if any, of the suppliers' cash discounts should the firm give up? c. Now assume that the firm could stretch by 30 days its accounts payable (net period only) from supplier M. What impact, if any, would that have on your answer in part b relative to this…arrow_forward
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