PRACTICE QUIZ - FINANCIAL MANAGEMENT (WORKING CAPITAL
MANGEMENT)
Bumpas Enterprises purchases P4,562,500 in goods per year from its sole
supplier on terms of 2/15, net 50.
If the firm chooses to pay on time but does not take the discount, what is the
effective annual percentage cost of its nonfree trade credit?
(Assume a 365-day year.)
a. 20.11%
b. 21.17%
c. 22.28%
d. 23.45%
e. 24.63%
SOLUTION:
EFFECTIVE ANNUAL INTEREST = [(1/1-DISC RATE)^(365/ACTUAL DAY
- DISCOUNT DAY) - 1]*100
EFFECTIVE ANNUAL INTEREST = [1/1-.02^(365/50 - 15) - 1]*100
EFFECTIVE ANNUAL INTEREST = [(1.02^10.43)-1]*100
EFFECTIVE ANNUAL INTERET = 23.45%