Assume the credit terms offered to your firm by your suppliers are 3/5, Net 30.

Question

Assume the credit terms offered to your firm by your suppliers are 3/5, Net 30. Calculate the cost of the trade credit if your firm does not take the discount and pays on day 30.

Which of the following companies are likely to have high short-term financing needs? Why?

a. A clothing retailer

b. A professional sports team

c. An electric utility

d. A company that operates toll roads

e. A restaurant chain

Sailboats Etc. is a retail company specializing in sailboats and other sailing-related equipment. The following table contains financial forecasts as well as current (month 0) working capital levels. During which months are the firm

Explanation / Answer

1) The cost of credit is calculated as:

Net 3/5, net 30 means if the amount is paid in 5 days, then the discount offered is 3%. Hence, the number of days left are 25 (30-5).

EAR = ( 1+ 3 / 97)^ (365/25) - 1

        = 56.00%

Interest rate per period = 3/ 97 = 3.09%

EAR = (1+0.0309) ^ (365/25) - 1 = 55.94%

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2) The professional sports team would have the high need of short term financing because of its seasonal revenue flow.

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3) In the 5th month, the need for working capital is more and the suplus cash is available.

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