question archive A large retailer obtains merchandise under the credit terms of 3/10, net 35, but routinely takes 60 days to pay its bills
A large retailer obtains merchandise under the credit terms of 3/10, net 35, but routinely takes 60 days to pay its bills
Subject:FinancePrice:2.86 Bought31
A large retailer obtains merchandise under the credit terms of 3/10, net 35, but routinely takes 60 days to pay its bills. (Because the retailer is an important customer, suppliers allow the firm to stretch its credit terms.) What is the retailer's effective cost of trade credit? Assume a 365-day year. Do not round intermediate calculations. Round your answer to two decimal places.
Purchase A New Answer
Custom new solution created by our subject matter experts
GET A QUOTE
Answer Preview
First let us know the periodic rate = discount rate / (1- discount rate ) *100
here,
discount rate = 3%=>0.03
periodic rate = 3 /(1-0.03) *100
=>3.09278351%.
=>0.0309278351
relevant duration of cost of trade credit = time taken to pay - discount period
=>60 -10
=>50.
number of periods in an year = 365 days / 50
=>7.3.
effective cost of trade credit = ( 1+ periodic rate)^number of periods -1
=> (1.0309278351)^7.3 - 1
=>0.24901122.
=>24.90%.
