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A large retailer obtains merchandise under the credit terms of 1/15, net 45, but routinely takes 60 days to pay its pill. Given that the retailer is an important customer, suppliers allow the firm to stretch its credit terms. What is the retailer's effective cost of trade credit? Please show calculations.

Periodic rate = Discount %

1 – Discount%

Periods per year = 360/(days allowed – discount period)

Effective cost of trade = (1 + periodic rate) periods per year - 1

1/15, net 45

Periodic rate = Discount %

1 – Discount%

= 1/99 = 0.01

Periods per year = 360/(days allowed – discount period)

= 360 /(45 – 15)

= 12

Effective cost of trade = (1 + periodic rate) periods per year - 1

= (1.01)12 – 1 = 0.1268 or 12.68%

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