Stay Tuff Corp. buys most of its raw materials from a single supplier. This supp

Question

Stay Tuff Corp. buys most of its raw materials from a single supplier. This supplier sells to Stay Tuff Corp. on terms of 3/20, net 45.

1. What is the cost per period of the trade credit extended to Stay Tuff Corp.? (Use 365 days as the length of a year in all calculations.)

a. 3.40%
b. 3.09%
c. 3.71%
d. 3.55%

2. What is the nominal annual cost of Stay Tuff Corp.'s trade credit?

a. 45.11%
b. 49.62%
c. 38.34%
d. 40.60%

3. What is the effective annual rate of interest on trade credit?

a. 67.20%
b. 56.00%
c. 53.20%
d. 61.60%

4. If Stay Tuff Corp.'s supplier shortens the discount period to five days, this will ________the cost of the trade credit.

a. increase
b. decrese

Explanation / Answer

1) cost of trade credit for period= (1 + (discount % / (1 – discount %))– 1

= (1 + (2% / 97%)) – 1

= 3.09%.

2) nominal annual cost = (365 / Discount days) x (Discount % / 1 - Disc %)*100

(365 / (45-20)) x (3/ 97)*100 = 45.11%

3) cost of trade credit f= (1 + (discount % / (1 – discount %))^(365/days past discount) – 1

cost of trade credit = (1 + (3% / 97%))^(365/(45 - 20) – 1

= 56%.

4) if discount period is reduced, days past discount increase causing cost of credit to decrease as it is inversely proportional to days past discount.

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