A Firm Is Offered Trade Credit Terms of 2/8,net 45

question 60

Multiple Choice

A firm is offered trade credit terms of 2/8,net 45.The firm does not take the discount,and it pays after 58 days.What is the effective annual cost of not taking this discount? (Note: Do not use the approximate cost. )

• A) 21.63%
• B) 13.35%
• C) 22.95%
• D) 15.65%
• E) 18.70%

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Definitions:

Trading

The act of buying and selling assets, such as stocks, bonds, commodities, or currencies, in financial markets to earn a profit.

Treasury Bills

Short-term government securities issued at a discount from the par value and mature without paying interest, where the difference represents the return to the investor.

Commercial Paper

An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories, and meeting short-term liabilities.

Corporate Bonds

Long-term debt issued by private corporations typically paying semiannual coupons and returning the face value of the bond at maturity.