University Furniture offers credit terms of 1/15 net 15. Based on experience, 85
ID: 2755029 • Letter: U
Question
University Furniture offers credit terms of 1/15 net 15. Based on experience, 85% of all customers take the discount. What is the average collection period? Lester's writes 20 checks a day for an average amount of $630 each. These checks generally clear the bank 2.5 days after they are written. In addition, the firm generally receives an average of $18,400 a day in checks. Deposited amounts are available after 2 days. What is the amount of the firm's disbursement float? When a new securities issue is underwritten, the underwriters retain the difference between the offering price and the buying price. What is this called?Explanation / Answer
Answer to Question (2)
Credit terms = 1/15 net 15
Period for which discount is offered = 15 -1 = 14 days
That is payment can be made between 1st day till 14th day.
Average number of days = (1+14)/2 = 7.5
Payment to be made on 15 day without availing discount
Proportion of customers taking discount = 85%
85% *7.5 + 0.15% * 15 = 6.375 + 2.25 = 8.625 or around 8 days
Answer to Question (3)
Number of Checks written per day = 20
Average amount = $ 630
Time taken for clearing the checks with bank = 2.5 days
Disbursement float = Number of checks written per day * Average amount of check * time taken for clearing
Disbursment float = 20 * $ 630 * 2.5 = $ 31500
Answer to Question (4)
The difference between the offer price and the buying price retained by the underwriters is known as
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