FIN100 INTRODUCTION TO FINANCE CHAPTER 16 HOME LESSON ASSIGNMENT

FIN100 INTRODUCTION TO FINANCE CHAPTER 16 HOME LESSON  ASSIGNMENT

CHAPTER 16

1.   A supplier is offering your firm a cash discount of 2% if purchases are paid for within ten days; otherwise the bill is due at the end of sixty days. Would you recommend borrowing from a bank at an 18 percent annual interest rate to take advantage of the cash discount offer? Determine both the Nominal Annual Rate (Cost) and the Effective Annual Rate (Cost). Explain your answer.

2.   Assume that you have been offered cash discounts on merchandise that can be purchased from either of two suppliers. Supplier A offers trade credit terms of 3/20, net 70, while Supplier B offers 4/15, net 80. What is the approximate effective annualized cost/nominal annual cost of missing the cash discounts from each supplier? If you could not take advantage of the either cash discount offer, which supplier would you select.

4. Compute the effective annualized cost and the nominal annual cost of not taking the cash discount under the following trade credit terms:

a. 2/10 net 40

b. 2/10 net 50

c. 3/10 net 50

d. 2/20 net 40

5. What conclusions can you make about credit terms from reviewing your answers to Problem 4?

6. Pretty Lady Cosmetic Products has an average production process time of forty days. Finished goods are kept on hand for an average of fifteen days before they are sold. Accounts receivable are outstanding an average of thirty-five days, and the firm receives forty days of credit on its purchases from suppliers.

a.      Estimate the average length of the firm’s short-term operating cycle. How often would the cycle turn over in a year?

b.      Assume net sales of $1,200,000 and cost of goods sold of $900,000. Determine the average investment in accounts receivable, inventories, and accounts payable. What would be the net financing need considering only these three accounts?

7.      Obtain a current issue of the Federal Reserve Bulletin, or review a copy from the Fed’s Web site ( http:// www. federalreserve. gov) or the St. Louis Fed’s Web site ( http:// www. stlouisfed. org), and determine the changes in the prime rate that have occurred since the end of 2000. Comment on any trends in the data.

8.      Compute the effective cost of not taking the cash discount under the following trade credit terms:

a.       2/10 net 40

b.      2/10 net 50

c.       3/10 net 50

d.      2/20 net 40