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19 May 2018

Assume a trade creditor offers you terms of 2/10 net 40.

A)What is the effective annual cost of forgoing the discount?

B)If the firm=s bank charges 14% on loans, would you take the trade credit discount?

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Deanna Hettinger
Deanna HettingerLv2
21 May 2018

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Use two decimal places in your answers ( please show work )

1. A firm plans to issue $5,000,000 of commercial paper for 30 days. A dealer will issue the paper at $4,985,000 at a fee of $2,000 in advance. What is the effective annual rate?

2. A firm has agreed to borrow $750,000 at a simple interest rate of 6% for 30 days to meet its short-term funding needs. The bank charges a loan processing fee of $1,000. What is the effective annual rate on this loan?

3. Assume a trade creditor offers you terms of 2/10 net 40. a. What is the effective annual cost of forgoing the discount? b. If the firm=s bank charges 14% on loans, would you take the trade credit discount?

4. A firm has established a revolving line of credit for $900,000 with a bank at a rate of prime plus 2%. There is an annual fee of 1/2% on any unused funds. Interest is discounted on loans. Prime was 5% when the agreement was made. Assume the firm decides to take down the line for $500,000 for 60 days when the prime is at 6%. What is the effective annual rate?

5. A firm has $500,000 in accounts receivable. A commercial bank will accept these accounts receivable as collateral and will advance the firm 75% of the accounts receivable amount on loan at 6%. The bank charges a $5,000 credit checking fee. The firm will use the agreement for 90 days. What is the effective annual rate?

6. A firm needs full use of $2,000,000 to purchase a new machine. A bank has agreed to loan at 9% discounted interest for 180 days. The bank requires a .25% compensating balance. The bank charges fees in advance of $300. a. How much will the firm need to borrow? b. What will be the effective annual rate on the loan?

7. A firm has $900,000 in inventory qualifying for a short-term loan with a warehouse receipt. A commercial bank will accept this warehousing agreement and inventory as collateral and will advance 80% of the value of the inventory on loan at 6%. The bank charges $5,000 upfront for the agreement. The firm will use the borrowing for 60 days. What is the effective annual rate on the borrowing?

Credit Standards step 1 assume you are a financial manager of a firm that sells most of it products on credit and also buys much of its raw materials on credit. Q-1 Explain the importance of your credit standards that you extend to your customers. Q-2 What are the options available to you to finance your inventory short-term? Q-3 What is the cost of forgoing a 2/10 net 30 trade discount to your firm?

Which of the following statements is FALSE?

Select one:

a. The lower the discount percentage offered, the greater the cost of forgoing the discount and using trade credit.

b. A firm should choose to borrow using accounts payable only if trade credit is the cheapest source of funding.

c. A firm should always pay on the latest day allowed.

d. A firm should strive to keep its money working for it as long as possible without developing a bad relationship with its suppliers or engaging in unethical practices.

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