4. Cost of trade credit

Firms usually offer their customers some form of trade credit. This allowance comes with certain terms of credit, which will affect the actual cost of asset being sold for the buyer and the seller.

Consider this case:

Tasty Tuna Corporation buys most of its raw materials from a single supplier. This supplier sells to Tasty Tuna on terms of 1/15, net 60.

a. The cost per period of the trade credit extended to Tasty Tuna is __________? A. 0.81% B. 0.89% C.1.15% D. 1.01%

(Note: Round all intermediate calculations to four decimal places, and your final answer to two decimal places.).

b. Tasty Tunas trade credit has a nominal annual cost of _____________ , assuming a 365-day year. A. 5.73% B.7.37% C.9.66% D 8.19%

(Note: Round all intermediate calculations to four decimal places, and your final answer to two decimal places.)

c. If Tasty Tuna Corporations supplier shortens its discount period to five days, this will __________ the cost of the trade credit. Decrease or Increase