Which of the following statements is correct?
A) If a firm begins buying on terms of 2/20,net 60,after having bought on terms of 2/10,net 30,this will,other things held constant,probably lengthen its cash conversion cycle.
B) If a firm begins buying on terms of 2/20,net 60,after having bought on terms of 2/10,net 30,this will,other things held constant,increase the cost of nonfree (costly)trade credit.
C) Because the loan is paid off faster,the effective interest rate is lower if a firm borrows $100,000 on the basis of a 10% "add-on interest rate" loan paid off in 12 equal monthly installments than if the firm borrows the $100,000 on a loan which calls for a nominal 10% rate and for all interest and principal to be paid (repaid)at the end of one year.
D) "Commercial paper" is the name given to a type of short-term loan typically used by firms that are too small and financially weak to obtain credit from banks and other normal sources of credit.
E) Statements a,b,c,and d are all false.

Question

Quizplus · Accepted Answer

All the statements provided are incorrect. Statement A is false because changing terms from 2/10, net 30 to 2/20, net 60 would likely extend the cash conversion cycle by allowing more time before payment is due, not necessarily lengthen it in a negative manner. Statement B is incorrect because changing the terms as described could actually decrease the cost of trade credit by allowing longer payment terms without immediate penalty. Statement C is false because an "add-on interest rate" loan typically results in a higher effective interest rate compared to a simple interest loan due to the way interest is calculated. Statement D is incorrect because commercial paper is a financing method used by large, financially stable companies to secure short-term funding, not by small and financially weak firms.

Which of the Following Statements Is Correct