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Suppose the Credit Terms Offered to Your Firm by Your

question 154

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Suppose the credit terms offered to your firm by your suppliers are 2/10,net 30 days.Out of convenience,your firm is not taking discounts,but is paying after 20 days,instead of waiting until day 30.You point out that the approximate cost of not taking the discount and paying on day 30 is around 37 percent.But since your firm is not taking discounts and is paying on day 20,what is the effective annual percentage cost (not approximate) of your firm's current practice,using a 360-day year?


Definitions:

Covariance

A statistical measure that indicates the degree to which two variables change together.

Standard Deviation

A statistical measurement that depicts the variability or volatility of an investment's returns.

EAFE Index

The Europe, Australasia, Far East index is a widely used index of non-U.S. stocks.

Weighting

The process of assigning different levels of importance or emphasis to various elements in a calculation or analysis.

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