16. Cost of trade credit

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:

Free Spirit Industries Inc. buys on terms of 2.5/15, net 45 from its chief supplier.

If Free Spirit receives an invoice for $1,545.78, what would be the true price of this invoice?

$2,110.00

$1,281.07

$1,507.14

$1,582.50

The nominal annual cost of the trade credit extended by the supplier is ____________ . (Note: Assume there are 365 days in a year.)

The effective annual rate of interest on trade credit is ______________

Suppose Free Spirit does not take advantage of the discount and then chooses to pay its supplier lateso that on average, Free Spirit will pay its supplier on the 50th day after the sale. As a result, Free Spirit can decrease its nominal cost of trade credit by___________% by paying late.