Assuming a 360-day year and that CyberAge continues paying on the last day of the credit period, the entity's weighted-average annual interest rate for trade credit ignoring the effects of compounding) for these two vendors is:
Answer(s): B
If the entity pays Web [...Taster within 10 days, it will save US $500 $25,000 2%). Thus, the entity is effectively paying US $500 to retain US $24,500 $25,000 - $500) for 20 days 30 - 10). The annualized interest rate on this borrowing is 36.7346% [(US $500 + $24,500) x 360 days ÷ 20 days)]. Similarly, the entity is, in effect, paying Softidee US $2,500 $50,000 5%) to hold US $47.500 $50,000 - $2,500) for 80 days 90 - 1 0). The annualized rate on this borrowing is 23.6842% [(US $2,501-1 - $47,500) 361 r days - 80 days)]. The average amount burrowed from Web Master is US $16,333 33 [$24,500 x 1 month x 20 days 30 days)]. The average amount borrowed from web master is US $126,666.67 [$47,500 x 3 months x 80 days ÷ 90 days)]. Thus, the weighted average of these two rates based on average borrowing is 25.2% [(US16,333,33 x 36.7346%) + ($126,666,67 x 23,6824%] ÷ $16,333.33 + $126,666.67)]. This calculation however, understates the true cost of not taking the discount because it does not consider the effects of compound. CyberAge Outlet, a relatively new store, is a cafe 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.
Should CyberAge use trade credit and continue paying at the end of the credit period?
Answer(s): D
The entity is currently paying an annual rate of 25.2% as determined below) to obtain trade credit and pay at the end of the credit period. This policy should be continued if trade credit is the only source of financing, or if other sources are available only at a higher rate. The annual rate is determined as follows If the entity pays Web Master within 10 days. it will US $500 2% X $25,000). Thus the entity is effectively paying US $500 to retain US $24,500 $25,000 $500) for 20 days 30 10). The annualized interest rate on this borrowing is 36.7346% [(US $500 $24,500) x 360 days 20 days)]. The annualized rate on this borrowing is 36,7346% [(US $500 $24,500) x 360 days 20 days)]. Similarly the entity 90 10). The annualized rate on this borrowing is 23,6842% [(US $2,500 ÷ $47,500 x 360 days ÷ 80 days)]. The average amount borrowed from Web Master is US $16,333,33 [1 month x $24,500 x 20 days ÷ 30 days)] and the average amount borrowed from Softidee is US $125,666,67 [3 months x $47,500 x 80 days ÷ 90 days)]. Thus, the weighted average of these two rates based on average borrowings is 25.2% {(36.7346% x US $16,333,33) + 23,6842% x $126,666.67)]. ÷ $16,333,33) + (23.6842% $126,666,66}] ÷ $16,333,33 + $126,666,67)].
A measure that describes the risk of an investment project relative to other investments in general is the:
The required rate of return on equity capital in the Capital Asset Pricing Model is the risk-free rate, plus the product of the market risk premium times the beta coefficient. The market risk premium is the amount above the risk-free rate that will induce investment in the market The beta coefficient of an individual share is the correlation between the volatility price variation) of the stock market and that of the price of the individual share. For example. if an individual share goes up 15% and the market only 10%. beta is 1.5.
The difference between the required rate of return on a given risky investment and that of a risk- free investment with the same expected return is the:
Answer(s): A
The market risk premium RM - RF) is the amount above the risk-free rate required to include average investors to enter the market. The risk premium is the portion of expected return attributed to the increased risk.
Capital structure decisions involve determining the proportions of financing from:
The optimal capital structure minimizes the weighted average cost of capital and thereby maximizes the value of the entity's stock. Both debt and equity are factors in an entity's capital structure.
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