Jem Traders, Inc. needs P100,000 to pay a supplier's invoices for a merchandise purchased with terms of 2/10, net 30. Jem Traders wants to pay on the 10th day of the credit term so it can avail of 2% discount. The funds needed can be raised by obtaining a short-term loan from a bank which agrees to grant a 30-day loan at 12% discounted interest per annum. The bank requires that a compensating balance of 10% be maintained in the borrower's non-interest earning deposit account.

a. The amount needed by Jem Traders to pay the invoice within the discount period is?

b. The principal amount of the loan that must be obtained from the bank to raise the needed fund is?

c. What is the effective interest rate of the loan?

d. If Jem Traders fails to pay the discount and pays the account on the 30th day of the term, what is the annual cost of this non-free trade credit?

Answer rating: 100% (QA)

a To take advantage of the discount Jem Traders needs to pay within 10 days of the credit term This ... View the full answer