Cost of trade credit. If a firm buys under terms of 3/15, net 50, but actually p
ID: 2642813 • Letter: C
Question
Cost of trade credit. If a firm buys under terms of 3/15, net 50, but actually pays on the twenty day and still takes discount, what is the nominal cost of its non free trade credit? Assume 365 days in cakculstions. Does it receive more or less credit that it would if it paid within 15 days? Cost of trade credit. If a firm buys under terms of 3/15, net 50, but actually pays on the twenty day and still takes discount, what is the nominal cost of its non free trade credit? Assume 365 days in cakculstions. Does it receive more or less credit that it would if it paid within 15 days?Explanation / Answer
Nominal cost of Trade = (discount percentage/100- Discount Percentage) x 365(Days credit - Discount Period)
Total days credit is 50 days and the payment is made on day 20 with discount
=3/97*365/(50-20)
=.031*365/15
=0.31*12.17 = 37.63%.
In the calculation we have taken 15 days of discount period.
=3/97*365/(50-15)
=.031*365/15
=0.31*10.43 = 32.25%.