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Cost of Trade Credit
A large retailer obtains merchandise under the credit terms of 1/20, net 35, but routinely takes 65 days to pay its bills. (Because the retailer is an important customer, suppliers allow the firm to stretch its credit terms.) What is the retailer's effective cost of trade credit? Assume 365 days in year for your calculations. Do not round intermediate calculations. Round your answer to two decimal places.
You are currently evaluating a new project for your company. The project requires an initial investment in equipment of RM90,000 and an investment in working capital of RM10,000 at the beginning (t = 0). The corporate tax rate is 30% and the cost of..
You are a hyperbolic discounter. In fact your discount rate between year t and year t+1 is given by .05/(1+t) for t=0(today), 1 (next year), 2, 3, … This means the discount rate between today and a year from now is .05. Calculate your discount factor..
Horse and Buggy Inc. is in a declining industry. Sales, earnings, and dividends are all shrinking at a rate of 15% per year. What price do you forecast for the stock one year from now? What is the cost of capital on the stock?
Each of the following factors is sometimes a constraint on the free movement of funds internationally. Why would a government impose such a constraint? How might the management of a multinational argue that such a constraint is not in the best intere..
Compute the Payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent and the maximum allowable payback is 3 years. Time: 0 1 2 ..
The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $22,000 per year forever. If the required return on this investment is 5.80 percent, how much will you pay for the policy?
Mary will receive $12,000 per year for the next 10 years as royalty for her work on a finance book. What is the present value of her royalty income if the opportunity cost is 12 percent?
Cheesburger and Taco Company purchases 6,441 boxes of cheese each year. It costs $27 to place and ship each order and $9.92 per year for each box held as inventory. The company is using Economic Order Quantity model in placing the orders.
Beta Industries has net income of $3,100,000, and it has 350,000 shares of common stock outstanding. The company's stock currently trades at $48 a share. Beta is considering a plan in which it will use available cash to repurchase 30% of its shares i..
Folic Acid Inc., has $20 million in earnings, pays $2.75 million in interest to bondholders, and $1.80 million in dividends to preferred shareholders. What are the common shareholders’ residual claims to earnings? What are the common shareholders’ le..
Bennington Industrial Machines issued 153,000 zero coupon bonds six years ago. The bonds originally had 30 years to maturity with a yield to maturity of 7.3 percent. Interest rates have recently increased, and the bonds now have a yield to maturity o..
If Rubash Corporation bought on terms of 1/10, net 30, what would be its nominal annual cost of costly trade credit? Assume a 365-day year. If Rubash were unable to stretch its trade credit and hence had to pay by Day 30 if it did not take discounts,..
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