Questions 4,6,7

QUESTION 4

Firm Z is short on cash but has $2 million of its $5 million credit line available at present, however. If the annualized interest rate on the credit line is less than the annualized cash discount rate on trade credit received, the payment decision that maximizes firm value is to

a.

compare the annualized cash discount rate to the daily investment rate, and take the discount if the cash discount rate exceeds the investment rate

b.

not take the discount, and pay at the end of the credit period

c.

borrow the necessary funds and take the cash discount

d.

compare the annualized cash discount rate to the daily investment rate, and take the discount if the cash discount rate is le than the investment rate

QUESTION 6

If the annualized effective cost of missing the trade credit discount is 14.90%, the length of discount period is 10 days, and the length of the net-trade credit period is 60 days, then what is the discount percentage?

	a.	1.5%
	b.	2.5%
	c.	2%
	d.	3%

1 points

QUESTION 7

Your firm is short of cash but can borrow from its credit line at an annualized cost of 5%. Further, your firm has just been offered trade credit terms of 2/10 net 30 for purchases made from a supplier. How and when should you repay the trade credit obligation?

	a.	on Day 10 with funds borrowed from the credit line
	b.	on Day 30 with funds borrowed from the credit line
	c.	on Day 10 with funds from the short-term investment holdings
	d.	on receipt with funds borrowed from the credit line

1 points