Fm22 23 - To obtain $41,670 of costly trade credit SKI must give up 0.01($512,106 = $5,121 in lost discounts annually Since the forgone discounts

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To obtain $41,670 of costly trade credit, SKI must give up 0.01($512,106) = $5,121 in lost discounts annually. Since the forgone discounts pay for $41,670 of credit, the nominal annual interest rate is 12.29 percent: 670 , 41 $ 121 , 5 $ = 0.1229 = 12.29%. Here is a formula that can be used to find the nominal annual interest rate of costly trade credit: credit trade of cost Nominal = . period discount taken ays D Days 5 36 % iscount D - 1 % iscount D × In this situation, %. 9 12.2 = 29 0.12 = 1667 . 12 0.0101 = 10 - 40 5 36 99 1 × × Note (1) that the formula gives the same nominal annual interest rate as was calculated earlier, (2) that the first term is the periodic cost of the credit (SKI spends $1 to get the use of $99), and (3) that the second term is the number of “savings periods” per year (SKI delays payment for 40 - 10 = 30 days), and there are 365/30 = 12.1667 30-day periods in a year. Therefore, we could calculate the exact effective annual interest rate as: effective rate = (1.0101)
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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