A large retailer obtains merchandise under the credit terms

A large retailer obtains merchandise under the credit terms of 2/15, net 45, but routinely takes 60 days to pay its bills. (Because the retailer is an important customer, suppliers allow the firm to stretch its credit terms.) What is the retailer\'s effective cost of trade credit? Assume 365 days in year for your calculations. Do not round intermediate calculations. Round your answer to two decimal places.

Solution

Nominal cost = Discount percentage / (100 – DP) * 365 / (Days credit outstanding – Discount period)

Nominal cost = 2 / 98 * 365 / 60 – 15

Nominal cost = 2 / 98 * 365 / 60 – 15

Nominal cost = 0.0204 * 365 / 45

Nominal cost = 0.0204 * 8.11

Nominal cost = 16.54%

EAR = (1.0204)^8.11– 1

EAR = 1.177954 – 1

EAR = 17.80%