Suppose a company uses trade credit with the terms 3/15, net 45. If the company pays its account on the 45th day, the effective borrowing cost of skipping the discount on day 15 is closest to: A 40% B 42% C 44% D 46%
Is there more information that goes with this question?
Nope, its from CFAI Chapter 46.
There is a formula to work this out. From memory it is something like: 1 + (Disc/1-Disc)^365/n Formula could be wrong but it is in the CFAI textbooks.
whats the answer, i get 44%
The cost of trade credit formula: Cost = ( 1 + 0.03/0.97)^365/30 - 1 = 44.86% 1 + (Disc/1-Disc)^365/n
Good call, missed this! Cost of trade credit = (1 + discount/(1-discount))^(365/number of days beyond discount period) - 1
I wonder if this is on the exam…
Some of these problems from the CFAI end of section questions are not covered in detail with Schweser. I’ll put as many up as I can today while I review.
ditchdigger, the cost of borrowing questions aren’t covered in Schweser either. Page 126.
So it is C I guess as 44.8 is closer? I don’t like the way the CFAI facks with us with C 44% D 46%
=44.85, THIS was a question on one of the sample exams…be on the look out!
Yeah, as a second time test taker I’m going to say you might want to know this formula (easy marks if you know it).