1. Terms of Sale. A firm offers terms of 1/10, net 30. What effective annual interest rate does the firm earn when a customer does not take the discount? Without doing any calculations, explain what will happen to this effective rate if:
A. The discount is changed to 2 percent.
B. The credit period is increased to 40 days.
C. The discount period is decreased to 20 days.
D. What is the EAR for each scenario?
2. What are the implications for a company’s Weighted Average Cost of Capital and Minimum Required Free Cash Flow Return on Assets if a company only uses Equity capital to finance its investment in Total Assets?