THMT 3362 MSVU Finance Effective Cost of Trade Credit Questions

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fnaz

Mathematics

THMT 3362

Mount Saint Vincent University

THMT

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There are four questions, Assignments must be in the form of a Word or Excel file, need to show calculations to obtain those procedure marks. I will send the question to you

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Solution:
For the first Dough-licious Company:
Discount rate(D)=2%
Discounted Period(P)=10
Total Period(T)=55
No of periods in a year(N)= 365/(T-P) = 365/(55-10) = 365/45 =8.111
Periodic rate(PR)= D/(1-D)
= 2%/(1-2%)
= (2/100)(1-2/100) = 2/(100-2) =2/98 = 0.02040
Effective cost of trade credit=( (1+PR)^(N) - 1)*100
= ((1+0.02040)^(8.111)- 1)*100 = 0.17797*100
=17.8%
For the Egg Static company:
Discount rate(D)=1%
Discounted Period(P)=5
Total Period(T)=60
No of periods in a year(N)= 365/(T-P) = 365/(60-5) = 365/55 = 6.6363

Periodic rate(PR)= D/(1-D)
= 1%/(1-1%)
= (1/100)(1-1/100) = 1/(100-1) =1/99 = 0.01010
Effective cost of trade credit=( (1+PR)^(N) - 1)*100
= ((1+0.01010)^(6.6363)- 1)*100 = 0.06896*100
= 6.896%

.
Effective cost of trade credit for Dough-licious Company > Bank borrow rate
Effective cost of trade credit for Egg Static company < Bank borrow rate
So, he should pay the Dough-licious Company within the discount period.
And, he should pay the Egg Static company at the end of the term.

Solution:
i) Sales:
In the present plan, Sales is $1,500,0000
As, the sales drops by 2% in the new plan.
And in the new plan, Sales is $1,500,0000*(100-2)/100 = $14,70,0000

Sale changes by $(14700000-15000000)=-$300000
And, the contribution in the earning is 10%,
So the change in earning before tax= -$300000*10/100 = -$30000
ii)Bad Debt:
In the present plan, Bad Debts was $350,000
In the new plan, Bed debt became halved, So, new bad debt will be
$350,000/2 = $175,000
So, the change in earning before tax= $350,000-$175,000 =$175,000
iii) Receivables:
Receivables in the present plan= $1,500,0000*75/365
= $3,082,192
Receivables in the new plan = $14700000*45/365
= $18,12,328
Change in rece...


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