Problem:
Items 1 and 2 are based on the following information:
CyberAge Outlet, a relatively new store, is a café that offers customers the opportunity to browse the Internet or play computer games at their tables while they drink coffee. The customer pays a fee based on the amount of time spent signed on to the computer. The store also sells books, tee shirts, and computer accessories. CyberAge has been paying all of its bills on the last day of the payment period, thus forfeiting all supplier discounts. Shown below are data on CyberAge's two major vendors, including average monthly purchases and credit terms.
|
Vendor
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Average monthly purchases
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Credit terms
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|
Web Master
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$25,000
|
2/10, net 30
|
|
Softidee
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50,000
|
5/10, net 90
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Assuming a 360-day year and that CyberAge continues paying on the last day of the credit period, the company's weighted-average annual interest rate for trade credit (ignoring the effects of compounding) for these two vendors is
1. 27.0%
2. 25.2%
3. 28.0%
4. 30.2%
Should CyberAge use trade credit and continue paying at the end of the credit period?
1. Yes, if the cost of alternative short-term financing is less.
2. Yes, if the firm's weighted-average cost of capital is equal to its weighted-average cost of trade credit.
3. No, if the cost of alternative long-term financing is greater.
4. Yes, if the cost of alternative short-term financing is greater.