What effective annual interest rate does the firm earn when a customer does not
ID: 2748992 • Letter: W
Question
What effective annual interest rate does the firm earn when a customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) What effective annual interest rate does the firm earn if the terms are changed to 3.8/7, net 30, and the customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) What effective annual interest rate does the firm earn if the terms are changed to 2.8/7, net 45, and the customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) What effective annual interest rate does the firm earn if the terms are changed to 2.8/12, net 30, and the customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)Explanation / Answer
a. 2.8/7, net 30.
Interest rate for the term of the discount = 2.8/97.2 = 2.88% for 30 - 7 = 23 days
effective annual interest rate, EAR = (1+periodic interest rate)m - 1
= (1.0288)(365/23) - 1 =0.5692 or 56.92%
b. 3.8/7, net 30
Interest rate for the term of the discount = 3.8/96.2 = 3.95% for 30 - 7 = 23 days
effective annual interest rate, EAR = (1+periodic interest rate)m - 1
= (1.0395)(365/23) - 1 =0.8492 or 84.92%
c. 2.8/7, net 45
Interest rate for the term of the discount = 2.8/97.2 = 2.88% for 45 - 7 = 38 days
effective annual interest rate, EAR = (1+periodic interest rate)m - 1
= (1.0288)(365/38) - 1 =0.3135 or 31.35%
d. 2.8/12, net 30
nterest rate for the term of the discount = 2.8/97.2 = 2.88% for 30 - 12 = 18 days
effective annual interest rate, EAR = (1+periodic interest rate)m - 1
= (1.0288)(365/18) - 1 =0.7784 or 77.84%
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