Problem 16-8 Cost of Trade Credit a. If a firm buys under terms of 1/15, net 30,
ID: 2727631 • Letter: P
Question
Problem 16-8 Cost of Trade Credit a. If a firm buys under terms of 1/15, net 30, 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. % b.Does it receive more or less credit than it would if it paid within 15 days? -Select-IIIIII 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
a.
1/99*365/(30-20)= 36.9%.
Because the firm still takes the discount on Day 20, 20 is used as the discount period in calculating the cost of non free trade credit.
b. 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.