Effective or equivalent, annual cost of trade credit.

Question

The Thompson Corporation projects an increase in sales from $1.5 million to $2 million, but it needs an additional $300,000 of current assets to support this expansion. Thompson can finance the expansion by no longer taking discounts, thus increasing accounts payable. Thompson purchases under terms of 3/10, net 30, but it can delay payment for an additional 15 days - paying in 45 days and thus becoming 15 days past due - without a penalty because its suppliers currently have excess capacity. What is the effective, or equivalent, annual cost of the trade credit? O 37.35% O 32.22% O 102.12% O 10.21% O 14.35%

Answer 1

Question

Chapter 16, Problem 16P

Summary Introduction

To determine: Effective or equivalent, annual cost of trade credit.

Expert Solution & Answer

Trending nowThis is a popular solution!

See solution

Check out sample textbook solution

Students have asked these similar questions

The Thompson Corporation projects an increase in sales from $1.5 million to $2 million, but it needs an additional $300,000 of current assets to support this expansion. Thompson can finance the expansion by no longer taking discounts, thus increasing accounts payable. Thompson purchases under terms of 3/10, net 30, but it can delay payment for an additional 15 days - paying in 45 days and thus becoming 15 days past due - without a penalty because its suppliers currently have excess capacity. What is the effective, or equivalent, annual cost of the trade credit? O 37.35% O 32.22% O 102.12% O 10.21% O 14.35%

The Thompson Corporation projects an increase in sales from $1.5 millionto $2 million, but it needs an additional $300,000 of current assets to support this expansion. Thompson can finance the expansion by no longertaking discounts, thus increasing accounts payable. Thompson purchasesunder terms of 2/10, net 30, but it can delay payment for an additional35 days—paying in 65 days and thus becoming 35 days past due—withouta penalty because its suppliers currently have excess capacity. What is theeffective, or equivalent, annual cost of the trade credit?

Butler Corp. (BC) sells its stainless-steel products on terms of “2/10, net 40”. BC is considering granting credit to retailers with total assets as low as $400,000. Currently the lowest asset limit is $850,000. BC believes sales will increase $10 million from the new credit group but the average collection period for this new group will be 80 days versus the current average collection period of 30 days. If management estimates that 40% of the new customers will take the cash discount and 10% of the new business will be written off as bad-debt loss, should BC lower its credit standards? Assume BC’s variable cost ratio is 0.80 and its required pretax rate of return on current assets investment is 14%. BC also estimates that an additional investment in inventory of $750,000 is necessary for the anticipated sales increase