Which one of the following is a spontaneous source of financing?
Answer (D) is correct. Trade credit is a spontaneous source of financing because it arises automatically as part of the purchase transaction.
Which one of the following provides a spontaneous source of financing for a firm?
Answer (A) is correct. Trade credit is a spontaneous source of financing because it arises automatically as part of a purchase transaction. Because of its ease in use, trade credit is the largest source of short-term financing for many firms both large and small.
Not an important source of financing for small firms.
A source of long-term financing to the seller.
Answer (C) is correct. Trade credit is a spontaneous source of financing because it arises automatically as part of a purchase transaction. The terms of payment are set by the supplier, but trade credit usually requires payment within a short period of time. Trade credit is an important source of credit for all businesses but especially for buyers, such as small businesses, that might not have access to other credit markets. Like all forms of financing, trade credit is subject to the risk of buyer default.
Usually an inexpensive source of external financing.
Which one of the following financial instruments generally provides the largest source of short-term credit for small firms?
Answer (C) is correct. Trade credit is a spontaneous source of financing because it arises automatically as part of a purchase transaction. Because of its ease in use, trade credit is the largest source of short-term financing for many firms both large and small.
Answer (B) is correct. The payment terms are 2/10, net 60. This means that Richardson will get a 2% discount, which would equal $2 ($100 � 2%), if it pays the invoice within 10 days. This means that not taking the discount will cost $2. This amount is partially offset by interest earned on $98 for 50 days of $.817. Thus, the net cost is $1.183 ($2.00 � $.817). Since a 360-day year has 7.2 fifty-day periods, the total annualized cost is $8.52 (7.2 � $1.183). The loss rate is about 8.7% ($8.52 � $98).
Which one of the following statements concerning cash discounts is correct?
The cost of not taking a 2/10, net 30 cash discount is usually less than the prime rate.
With trade terms of 2/15, net 60, if the discount is not taken, the buyer receives 45 days of free credit.
The cost of not taking the discount is higher for terms of 2/10, net 60 than for 2/10, net 30.
Answer (D) is correct. Payments should be made within the discount periods if the cost of not taking discounts exceeds the firm�s cost of capital. For example, failing to take a discount when terms are 2/10, net 30 means that the firm is paying an effective annual interest rate exceeding 36%. Thus, the cost of not taking a discount is usually higher than the cost of a bank loan.
Maple Motors buys axles in order to produce automobiles. Maple carries an average credit balance of $25,000,000 with its axle supplier. The axle supplier provides credit terms of 1/10 net 25. The nominal annual cost of Maple not taking the trade discount is closest to which one of the following? Assume a 360-day year.
Garo Company, a retail store, is considering forgoing sales discounts to delay using its cash. Supplier credit terms are 2/10, net 30. Assuming a 360-day year, what is the annual cost of credit if the cash discount is not taken and Garo pays net 30?