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:

Green Moose Industries buys most of its raw materials from a single supplier. This supplier sells to Green Moose on terms of 2/10, net 60.

1) The cost per period of the trade credit extended to Green Moose, rounded to two decimal places, is ??

a. 2.20%

b. 2.04%

c. 2.33%

d. 1.63%

2) Green Mooses trade credit has a nominal annual cost of ??, assuming a 365-day year. (Note: Round all intermediate calculations to four decimal places, and your final answer to two decimal places.)

a. 14.89%

b. 10.42%

c. 17.57%

d. 16.68%

3) The effective annual rate (EAR) of the suppliers trade credit is ??

a. 18.74%

b. 12.70%

c. 17.15%

d. 15.88%

4) If Green Moose Industriess supplier shortens its discount period to five days, this will (a. Increase OR b. decrease) the cost of the trade credit.

a. Decrease

b. Increase