Fundamentals of Corporate Finance, 8^th edition, Brealey, Myers, Marcus,

(Chpt 20, Q3, LO2)

8.Company X sells on a 1/20, net 60, basis. Company Y buys goods with an invoice of $ 1,000.

a.How much can company Y deduct from the bill if it pays on day 20?

1% of $1,000, or $10.00.

b.How many extra days of credit can company Y receive if it passes up the cash discount?

60 days minus 20 days = 40 days

c.What is the effective annual rate of interest if Y pays on the due date rather than day 20?

Effective annual rate = (1+ discount / discounted price) 365 / extra days of credit -1

= (1 + 10 / 990) 365/40- 1

= (1.0101) 9.125- 1 =

= 1.09603617- 1

= .09603617

Verify answers please.