Freeman Builders, Inc. buys on terms of 2/15, net 30. It does not take discounts

Question

Freeman Builders, Inc. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 60 days after the invoice date. What is the company's nominal cost of trade credit, based on a 365-day year?

a. 17.81%

b. 13.41%

c. 63.49%

d. 49.66%

e. 16.55%

Andrews Corporation buys on terms of 1/8, net 45 days, it does not take discounts, and it actually pays after 58 days. What is the effective cost of its trade credit? (Use a 365-day year.)

17.52%

7.37%

7.61%

9.96%

10.42%

17.52%

7.37%

7.61%

9.96%

10.42%

Explanation / Answer

Cost of trade credit:

= (1+D÷(1-D))^(365÷n)-1

D is discount rate

n is Number of days after discount period

= (1+2%÷(1-2%))^(365÷45)-1

= 17.81%

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