Question

Firms usually offer their customers some form of trade credit. This allowance comes with certain terms of credit, which affect the cost of asset of sale for the buyer as well as the seller. Consider this case:Primatech Goods Corp. buys most of its raw materials from a single supplier. This supplier sells to Primatech Goods Corp. on terms of 2/20, net 30.What is the cost per period of the trade credit extended to Primatech Goods Corp.?a. 2.04%b. 2.24%c. 1.73%d. 1.94%What is the nominal annual cost of Primatech Goods Corp.'s trade credit?a. 63.29%b. 78.18%c. 81.91%d. 74.46%If Primatech Goods Corp.'s supplier shortens the discount period to five days, it will _____ the cost of the trade credit.a. increaseb. decrease

Answer 1

1. a. 2.04%
2. d. 74.46%
3. b. decrease

Step-by-step explanation:

1. Cost per period

= Discount/ (1 - Discount)

= 2% / ( 1 - 2%)

= 2.04%

2. Nominal Annual cost

= Cost per period * (365 / (Payment period - Discount period)

= 2.04% *
`(365)/(30 - 20)`

= 74.46%

3. Shortens it to five days.

= 2.04% *
`(365)/(30 - 5)`

= 29.78%

If Primatech Goods Corp.'s supplier shortens the discount period to five days, it will decrease the cost of the trade credit.