Question

Themes Page Setup Scale to Fit Sheet Options M26 Х A B C D E G H K 4 5 6 Biscuit Boyz buys $9 million per year of materials (net of discounts) on terms of 2/20, net 60; and it currently pays on the 20th day and takes discounts. Biscuit plans to expand, which will require additional financing. If Biscuit decides to forgo discounts, how much additional credit could it obtain, and what would be the nominal and effective cost of that credit? 7 8 9 10 11 12 13 daily sales 14 15 Terms of trade 16 2/20, net 60 17 discount % discount days days of credit 18 Nominal cost of trade credit 19 20 21 Days of costly credit Effective cost of trade credit 22 23 24 additional credit 25 Problem 4 Problem 13 Problem 5 Problem 12 Problem 6 Problem 7 Problem 8 9 10 Problem 11 Ready Type here to search

Answer 1

Daily Sales = Annual Sales/365 =9000000/365 =24657.53

Discount =2%
Discount Days =20
Days of Credit =60

Nominal Cost of Credit =Discount/(100% -discount) * 365/( days of credit - discount period )=2%/(100%-2%)*365/(60-20)=18.62%

Days of Costly Credit =60-20=40
Effective Cost of Credit = (1 + Discount/(100% -discount) ^365/( days of credit - discount period ) -1
=(1+2%/98%)^(365/(60-20))-1 =20.24%

Additional Credit =Sales/365*Days of Costly credit =9000000/365*40=986301.37