A firm offers terms of 3/7, net 30. What effective annual interest rate does the

Question

A firm offers terms of 3/7, net 30.

  

What effective annual interest rate does the firm earn when a customer does not take the discount?(Use 365 days a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

   

What effective annual interest rate does the firm earn if the terms are changed to 4/7, net 30, and the customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

  

What effective annual interest rate does the firm earn if the terms are changed to 3/7, net 45, and the customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

  

What effective annual interest rate does the firm earn if the terms are changed to 3/12, net 30, and the customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

A firm offers terms of 3/7, net 30.

Explanation / Answer

Nominal cost of trade credit = [ Discount percentage / (100- Discount Percentage) ] x [ 365Days / (credit is Outstanding-Discount Period) ]

a

b

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d

Nominal cost of trade credit =   = ( 3/97)* (365/(30-7)) 49.08% Effective cost of trade: Periodic rate = 0.03 / 0.97 0.031 Periods/year = 365 /(30-7) 15.870 EAR = (1 + periodic rate)^N – 1 EAR = (1.03)^15.87 – 1 62.16%

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