Charles Smith recently was hired as president of Dellvoe Office Equipment Inc., a small manufacturer of metal office equipment. As his assistant, you have been asked to review the company’s short-term financing policies and to prepare a report for Smith and the board of directors. To help you get started, Smith has prepared some questions that, when answered, will give him a better idea of the company’s short-term financing policies. Like most small companies, Dellvoe has two primary sources of short-term debt: trade credit and bank loans. One supplier, which supplies Dellvoe with $50,000 of materials a year, offers Dellvoe terms of 2/10, net 50.
A. What are the amounts of free credit and costly credit under both discount policies?
B. What is the APR of the costly trade credit?
C. What is its EAR?