Problem 5 Ready Flashlights, Inc. needs P300,000 to take a cash discount of 2/10, net 70. A banker will loan the money for 60 days at an interest cost of PS,500. Required: a. What is the cffective rate on the bank loan? b. How much would it cost (in percentage terms) if the firm did not take the cash discount, but paid the bill in 70 days instead of 10 days? c. Should the firm borrow the money to take the discount?
Problem 5 Ready Flashlights, Inc. needs P300,000 to take a cash discount of 2/10, net 70. A banker will loan the money for 60 days at an interest cost of PS,500. Required: a. What is the cffective rate on the bank loan? b. How much would it cost (in percentage terms) if the firm did not take the cash discount, but paid the bill in 70 days instead of 10 days? c. Should the firm borrow the money to take the discount?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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help me answer this problem 5 ty
Transcribed Image Text:Problem 5
Ready Flashlights, Inc. needs P300,000 to take a cash discount of 2/10, net 70. A
banker will loan the money for 60 days at an interest cost of PS,500.
Required:
a. What is the effective rate on the bank loan?
b. How much would it cost (in percentage terms) if the firm did not take the cash
discount, but paid the bill in 70 days instead of 10 days?
c. Should the firm borrow the money to take the discount?
d. If the banker requires a 20 percent compensating balance, how much must the
firm borrow to end up with the P300,000?
e. What would be the effective interest ráte in part d if the interest charge for 60
days were P6,850? Should the firm borrow with the 20 percent compensating
balance? (The firm has no funds to count against the compensating balance
requirement.)
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