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Basic Question 1 of 23
True or False? Bradley Mfg. changed its credit terms from 2/10 net 30 to 2/10 net 40. It is reasonable to assume that the firm's average collection period will be increased by this action.
User Contributed Comments 2
| User | Comment |
|---|---|
| johntan1979 | This is only true because the question is testing our understanding of the formula for cost of trade credit. However, if the short-term cost of borrowing is lower than the cost of trade credit, then regardless of n/30 or n/40, the optimal decision is still to take the discount. |
| ascruggs92 | ^Optimally you wouldn't have to pay at all lol. The cost of trade credit isn't something considered by most companies because the assumption that they would have taken the 2% they saved and reinvested it at a prevailing rate (a key assumption in any time value/yield calculation) is not a reality. Reality is that it minimizing A/R and building A/P are more common goals. Hence, this most likely would lead to a longer average collection period. |
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Learning Outcome Statements
explain liquidity and compare issuers' liquidity levels
CFA® 2024 Level I Curriculum, Volume 2, Module 4.