Mill Street Corporation sells its goods with terms of 4/8 EOM, net 47

Finance Dec 19, 2020

Mill Street Corporation sells its goods with terms of 4/8 EOM, net 47. What is the implicit cost of the trade credit?

Expert Solution

The implicit cost is 38.46%.

The quota 4/8 EOM, net 47 implies that if the credits are paid in full in the 8 days following the end of the month, there is a 4% discount. Full payment is expected in 47 days.

The implicit cost = discount rate/ (1 - discount rate) * 360/(full payment day - discount payment days) = 4%/(1 - 4%)*360/(47 - 8) = 38.46%. .

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