# Calculate the approximate cost of giving up the cash

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Unformatted text preview: . The credit terms offered by these suppliers are shown in the following table. Supplier Credit terms J 1/10 net 30 EOM K 2/20 net 80 EOM L 1/20 net 60 EOM M 3/10 net 55 EOM a. Calculate the approximate cost of giving up the cash discount from each supplier. b. If the firm needs short-term funds, which are currently available from its commercial bank at 16%, and if each of the suppliers is viewed separately, which, if any, of the suppliers’ cash discounts should the firm give up? Explain why. c. What impact, if any, would the fact that the firm could stretch its accounts payable (net period only) by 30 days from supplier M have on your answer in part b relative to this supplier? LG2 15–6 Changing payment cycle Upon accepting the position of chief executive officer and chairman of Reeves Machinery, Frank Cheney changed the firm’s weekly payday from Monday afternoon to the following Friday afternoon. The firm’s weekly payroll was \$10 million, and the cost of short-term funds was 13%. If the effect of this change was to delay check clearing by 1 week, what annual savings, if any, were realized? LG2 15–7 Spontaneous sources of funds, accruals When Tallman Haberdashery, Inc., merged with Meyers Men’s Suits, Inc., Tallman’s employees were switched from a weekly to a bi-weekly pay period. Tallman’s weekly payroll amounted to CHAPTER 15 Current Liabilities Management 661 \$750,000. The cost of funds for the combined firms is 11%. What annual savings, if any, are realized by this change of pay period? LG3 15–8 Cost of bank loan Data Back-Up Systems has obtained a \$10,000, 90-day bank loan at an annual interest rate of 15%, payable at maturity. (Note: Assume a 360-day year.) a. How much interest (in dollars) will the firm pay on the 90-day loan? b. Find the effective 90-day rate on the loan. c. Annualize your result in part b to find the effective annual rate for this loan, assuming that it is rolled over every 90 days throughout the year under the same terms and circumstan...
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## This document was uploaded on 01/19/2014.

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