Principles of Finance · free preview
Trade Credit and Its Pricing
Trade credit terms like 2/10 net 30 offer an early-payment discount whose forgone value prices the credit after the discount period at a steep annual rate, so firms should take discounts and grant credit with priced terms of their own.
1. Terms and the discount decision
Terms and the discount decision
2. The cost asymmetry
The cost asymmetry
3. The take-or-leave analysis worked
The take-or-leave analysis worked
4. Granting credit soundly
Granting credit soundly
5. Reading the terms
An invoice carries terms of 2/10 net 30. What do the terms mean?
6. The annualized cost computation
What is the approximate annualized cost of forgoing the 2/10 net 30 discount?
7. The take-or-leave rule
A firm with a 10 percent bank line faces 2/10 net 30 terms. What should it do?
8. The rare exception
Under what condition might a firm rationally forgo a quick-payment discount?
9. Granting credit's pricing
When a firm sells on credit, how should it set its customer terms?
10. The soft benefits
Beyond the arithmetic, why do suppliers favor customers who take discounts promptly?
11. The early payment window
What two-word term names the period within which the quick-payment discount is available? Answer in lowercase.
12. The forgone discount's rate
What three-letter abbreviation names the annualized percentage cost of forgoing a quick-payment discount? Write the abbreviation.
13. The net figure's meaning
In 2/10 net 30, the word net signals the full amount is due at the end of what period? Answer with two words.
14. The crossing document
In international trade, what two-word document, issued by a bank on the buyer's behalf, promises payment to the exporter when terms are met? Answer in lowercase.
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