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4. The cost of trade credit Extensive Enterprise Inc. is a relatively small player in its market. Its new Chief Financial Officer (CFO), Jorge Smith, has suggested that its credit policy may be one possible source of the company's tower-than-desired sales. This is because Extensive currently sells all of its product on either a cash on delivery (COD) or a cash before delivery (CBD) basis, depending upon the buying volume of the customer. Jorge observed that one possible strategy to increase Extensive's sales is to offer trade credit to its most creditworthy customers. Offering trade credit will involve both risks and returns to Extensive. Indicate which of the following statements regarding these risks and returns are true or false, When Extensive offers a cash discount in its credit terms, it is intentionally reducing the net sales price of its products. This statement True False Trade credit is a non-spontaneous source of financing for Extensive customers This statement is False True Trade credit is a non-spontaneous source of financing for Extensive's customers, This statement is: False True Last week, Jorge met with several of the firm's larger, more creditworthy customers, including the Turner Newspaper Group. In the course of this meeting, he suggested terms of 4/10 net 15, but two things became quickly apparent: Not everyone remembered how to calculate the cost of trade credit, so a review of the equation should be conducted, and While everyone acknowledged that these terms are consistent with the industry's standards, they are concerned with the magnitude of the implicit costs associated with paying on various dates throughout the credit period, Therefore, you need to do two things: Identify the individual elements in the annual financing cost of trade credit equation, and Calculate the implicit costs of paying on several dates throughout Extensive's credit period. Begin with the identification of the variables in the annual financing cost of trade credit equation. Then, use the equation to compute the annual financing cost of the trade credit assuming that the invoices are paid on the indicated days. Remember, Jorge suggested terms of 4/10 net 15. Cost of Trade Credit Variable Variable Variable Varie - VND Identity of the Variable Variable B E Cost of Trade Credit Payment Date Day 10 Day 11 Day 15 Day 25 (Two weeks late) Looking at the trend in the implicit costs of trade credit in the preceding table, what can you conclude about these costs? Read the following statement and determine if it is true or false. If a customer decides to forgo the cash discount, then he should make his payment on the day after its expiration if he wants to minimize the cost of his trade credit D E Cost of Trade Credit Payment Date Day 10 Day 11 Day 15 Day 2 (Two weeks late) Looking at the trend in the implicit costs of trade credit in the preceding table, what can you conclude about these costs? Read the following statement and determine if it is true or false If a customer decides to forgo the cash discount, then he should make his payment on the day after its expiration if he wants to minimize the cost of his trade credit This statement is: False True

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