Cost of Trade Credit If a firm buys under terms of 1/15, net 40, but actually pa
ID: 2650820 • Letter: C
Question
Cost of Trade Credit
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 365 days in year for your calculations. Do not round intermediate calculations. Round your answer to two decimal places.
%
Does it receive more or less credit than it would if it paid within 15 days?
-Select-IIIIIIItem 2
I. Paying before the discount period and taking the discount gives the firm more credit than it would receive if it paid within 15 days.
II. Paying after the discount period, but still taking the discount gives the firm more credit than it would receive if it paid within 15 days.
III. Paying after the discount period, but still taking the discount gives the firm less credit than it would receive if it paid within 15 days.
Explanation / Answer
1.
Nominal cost of its nonfree trade credit= (Discount Percent/(100 - Discount percent ))X( 365/Days Credit is outstanding)
Nominal cost of its nonfree trade credit=(1/(100-1))*(365/40)= 9.22%
2.
Option 2: Paying after the discount period, but still taking the discount gives the firm more credit than it would receive if it paid within 15 days. As the firm will get the same discount even after holding the money for longer time