Question 1. Why is some trade credit called free while other credit is called costly? If a firm buys on terms on 2/10,net 30, pays at the end of the 30th day, and typically shows $300,000 of accounts payable on its balance sheet, would the entire $300,000 be free credit? Would it be costly credit, or would some be free and some costly?. Please explain answer and no calculations is needed.
Question 2. Working Capital policy: The Rentz corporation is investigating the optimal level of current rent assets for the coming year. Management expects sales to increase to approximately $2million as a result of an asset expansion presently being undertaken .Fixed assets total $1million, and the firm plans to maintain a 60% debt ratio. Rentz's interest rate is currently 8% on both short-term and longer-term debt (which the firm uses in its permanent structure) Three alternatives regarding the projected current assets level are under consideration:(1) a tight policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 12% of total sales, and the federal -plus-state tax rate is 40%.
a) What is the expected return on equity under each current asset level?
b) In this problem, we assume that expected sales are independent of the current asset policy. Is this a valid assumption?
c) How would the firm's risk be affected by the different policies?