Chapter 16 rking Capital Management ded Assignment|Read Chapter 16 | Back to Ass

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Chapter 16
rking Capital Management ded Assignment|Read Chapter 16 | Back to Assignment Due Sunday 07.01.18 at1 Attempts: Keep the Highest: /3 4. Cost of trade credit er their customers some form of trade credit. This allowance comes with certain terms of credit, Firms usually off which affect the cost of asset of sale for the buyer as well as the seller. Consider this case: Tasty Tuna Corporation buys on terms of 3/20, net 45 from its chief supplier if Tasty Tuna receives an invoice for $2,100.98, what would be the true price of this invoice $1,528.46 O $2,547.44 $2,037.95 O $2,139.85 The nominal annual cost of the trade credit extended by the supplier is Suppose Tasty Tuna does not take advantage of the discount and then chooses to pay its supplicr late-so that on average, On average, Tasty Tuna will pay its supplier on tho 50th day after the sale. As a result, Tasty Tuna can decrease its nominal cost of trade credit by by paying late. MacBook ?0

Explanation / Answer

Value of invoice=$2,100.98

Terms of credit=3/20 net 45 that is 3% discount

True price of invoice=2,100.98*97%=$2,037.95

Nominal annual cost of trade credit=(discount/100-discount)*365/(payment date-discount period)

=2/(100-2)*365/(45-20)

=2/98*365/25

=0.298 or 29.8%

We are paying after 50 days, so we are 50-20=30 days behind the credit period.

So nominal cost of trade crdit=2/98*365/30=0.2483 or 24.83%

Savings in nominal cost of credit for the company=(29.8-24.83)%=4.97%

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