What are the key point out of this chapter. this chapter is length as F. and equally boring, what are we expected to know out of this chapter? Chap 46 of the CFA text.
I was just going over that one and was wondering the same…very boring The things I’ve seen come up repeatedly are: Operating Cycle Net Operating Cycle Turnover Ratios - probably seen elsewhere in the texts Trade Discounts Cost of Borrowing (last page or 2 of the reading)
Trade discounts? well that is not clearly explained. 1/10 of 30 means you get 1% off if paid within 10 days or else the entire amount is due. I don’t get it, do you want cost of trade credit to be lower or higher? another great job by cfa text leaving it vague.
what jk86 said (though i didnt pay attention to the trade discount) also, how well the company is managing its receivables, evaluating their liquidity, what their credit policies are like compared to the industry, etc…
also picking appropriate short term investments or financing methods
There was a questionon trade credit/discounts on Mock Exam 1. Trade Credit = ((1+[Discount/1-discount])^(365/days beyond discount period)) - 1
sox, but how do you interpret a trade credit number?
Say you bought something and your terms of credit are like this: if you pay in 10days, you’ll get a 2% discount on your purchase, or net in 45 days (that’s to say if you don’t pay in 10 days you don’t have the discount). So, this would make trade credit = ((1+[2%/(1-2%])^(365/(45-10))) - 1 = 23.45%
2/10 NET 30 would look like this: Trade Credit = ((1+[.02/1-.02])^(365/20)) - 1 = 44.6%
yeap, mine would be 2/10 net 45:))
It’s basically showing that the cost goes down the further you are past the discount date. So if you’re not taking the discount then don’t pay til the last day in order to minimize the trade credit
and what kind of trade credit is desirable? higher number or lower?
lower
If your cost of funds or short-term investments are returning less than the calculated trade credit, then the discount offers a better return over your short-term borrowing rates…
thanks for the explanation, i definitely wouldn’t have gone over that topic again luckily it’s pretty similar to a lot of the yield formulas so i think i’ll manage to keep it in my head