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Effective interest/CCC/payable days

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Problem 1
Company A purchases goods from its supplier on terms of 2/10, net 40. The effective annual cost to Company A if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to 60 days is closest to: What is the EAR, effective annual rate?

Problem 2
Company A had sales of $980 million and a cost of goods sold of $560 million in 2006. A simplified balance sheet for the Company A appears below:

Company A Balance Sheet As of December 31, 2006 (millions of dollars)
Company A cash conversion cycle is closest to: (Number of days)

Problem 3
Company A had sales of $980 million and a cost of goods sold of $560 million in 2006. A simplified balance sheet for the firm appears below:

Company A Balance Sheet As of December 31, 2006 (millions of dollars)

Company A Accounts Payable days is closest to: (Number of days)

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Solution Summary

The solution explains how to calculate the effective interest rate, cash conversion cycle and AP days

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1. The terms are 2% discount is paid in 10 days else full payment is due in 40 days. The company stretches the payment to 60 days
The EAR is calculated as
EAR = (1+ periodic rate)^frequency - 1
The ...

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