Trade Credit Terms

CFA Level I Corporate Finance
#1

Hi All,

Long time lurker, first time poster. I can’t seem to grasp trade credit terms. For those of you have Elan I just the 2nd AM Mock Exam #75 is the example.

A copmany has been offered trade credit terms of ‘2/20 net 40.’ The cost of trade credit if the company pays on the 30th day is closest to:

A 109.05%

B. 27.86%

C. 44.59%

The answer is A and when I look at the answer key they just plug in numbers and get the answer. If someone could explain the reasoning behind it so I can get an understanding of it, it would be much appreciated.

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#2

(1 + 2%/1-2%) raised to 365/10 = 2.09

then subtract 1 and multiply by 100% to get A

10 is the no. of days beyond the discount period. 10 = 30 (date paid)- 20 (last day of discount)