7a) Tangshan Mining was extended credit terms of 3/15 net 30 EOM. The cost of gi

Question

7a)

Tangshan Mining was extended credit terms of 3/15 net 30 EOM. The cost of giving up the cash discount, assuming payment would be made on the last day of the credit period would be _______. If the firm were able to stretch its accounts payable to 60 days without damaging its credit rating, the cost of giving up the cash discount would only be ______.

A) 74%; 21.90%
B) 73%; 24%

C) 73%; 18.25%
D) 75%; 25.09%

7b)

What is the value of a $1,000 face value bond that pays a 5% coupon rate that will mature in 3 years if the interest rate on similar risk bonds is 6%?

A) $ 1,054.23
B) $ 1,107.11
C) $ 973.27

Explanation / Answer

Ans:- 7(a) correct option is (D) 75%, 25.09%. Calculation of cost of giving cash discount is as follows:-

Cost of giving cash discount = Discount rate / (1- discount rate) X 365/ (allowed credit days - Discount Days)

When credit term is 3/15 net 30:-

= 0.03 / (1.00-0.03) x 365/(30-15)

= 0.03/0.97 x 365/15

= 0.0309 x 24.333

=0.7518

=75 % (round off)

When credit period stretched to 60 days :-

= 0.03 / (1.00-0.03) x 365/(60-15)

= 0.03/0.97 x 365/45

= 0.0309 x 8.111

=0.2509

=25.09 %

Ans:- 7(b) :- Correct option is (c) $973.27. Calculation of Value is as follows:-

Value of bond = Maturity value x PVIF (r,n) + Yearly Interest x PVAIF(r, n )

= 1000 x PVIF (6%, 3)  + 50 x PVAIF(6%, 3 )

= 1000x0.8396 + 50x2.673

=839.61 + 133.66

= 973.27

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