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Question - A very large retailer obtains merchandise from its supplier under the credit terms 1/15, Net 45, but routinely takes 365 days to pay its bills. Given that the very large retailer is an important customer, the supplier allows the firm to stretch its credit terms.
a) What is the effective cost of trade credit under the contract terms? (Assume the large retailer does not take the discount.)
b) What is the effective cost of trade credit given the actual payment date?
c) Does the large retailer have a relatively large or relatively small accounts payable balance if it routinely takes 365 days to pay its bills? Why?
d) If the large retailer routinely takes 365 days to pay its bills, what happens to the large retailer's cash conversion cycle?
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