I want to correct answer The Reynolds Corporation buys from its suppliers on terms of 2/10, net 55. Reynolds has not beenutilizing the discounts offered and has been taking 55 days to pay its bills.Mr. Duke, Reynolds Corporation vice president, has suggested that the company begin to take thediscounts offered. Duke proposes that the company borrow from its bank at a stated rate of 14percent. The bank requires a 20 percent compensating balance on these loans. Current accountbalances would not be available to meet any of this compensating balance requirement.Do you agree with Duke's proposal?

To determine whether Duke's proposal is financially sound, we must compare the cost of not taking…

Answered: The Reynolds Corporation buys from its…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 19P

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The Reynolds Corporation buys from its suppliers on terms of 2/15, net 55. Reynolds has not been utilizing the discounts offered and has been taking 55 days to pay its bills. Ms. Duke, Reynolds Corporation's vice president, has suggested that the company begin to take the discounts offered. Duke proposes that the company borrow from its bank at a stated rate of 21 percent. The bank requires a 29 percent compensating balance on these loans. Current account balances would not be available to meet any of this compensating balance requirement. Calculate the cost of not taking a cash discount. Note: Use a 360 day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Calculate the effective rate of interest if the company borrows from the bank. Note: Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Do you agree with Duke's proposal? multiple choice No Yes
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Wrexham Corp. (WC) purchases computer parts from its suppliers 1/15, net 30. However, to take advantage of the discount WC needs to get a bank loan. The bank charges 8% interest (APR) and a one percent origination fee for the loan (assume the loan is for 1 year and is renewed yearly). What is the effective annual cost of not taking the trade discount? What is the effective cost of the bank loan? Should WC take out the bank loan to take advantage of the trade credit?
Monterry Corporation has an existing loan in the amount of 7 million with an annual interest rate of 6.5% The company provides an internal company - prepared financial statement to the bank under the loan agreement. Two competing banks have offered to replace Monterrey Corporation's existing loan agreement with a new one. Southwest National Bank has offered to loan Monterrey 7 million at a rate of 5.5% but requires Monterrey to provide financial statements that have been reviewed by a CPA firm. First City Bank has offered to loan Monterrey 7 million at a rate of 4.5% but requires to provide financial statements that have been audited by a CPA firm. Monterrey Corporation's controller approached a CPA firm and was given an estimated cost of $45,000 to perform a review and $80,000 to perform an audit.
Dunder Corporation has an existing loan in the amount of $8 million with an annual interest rate of 6.0%. The company provides an internal company-prepared financial statement to the bank under the loan agreement. Two competing bank: have offered to replace Dunder Corporation's existing loan agreement with a new one. Sunset Lending Bank has offere to loan Dunder $8 million at a rate of 5.2% but requires Dunder to provide financial statements that have been reviewed by a CPA firm. Big Top Bank has offered to loan Dunder $8 million at a rate of 4.4% but requires Dunder to provide financial statements that have been audited by a CPA firm. Dunder Corporation's controller approached a CPA firm and was given an estimated cost of $29,000 to perform a review and $51,000 to perform an audit. Read the requirements. (Enter amounts in dollars, not millions, throughout.) of the lower information risk. A review report provides moderate users. Compared to a review report, an audit provides further…
JENNY Company has been granted credit terms of 2/10, net 30 by the supplier. JENNI operates 360 days a year.Required: 1. Compute the nominal annual cost of credit or the cost of forgoing the cash discount 2. If the prevailing nominal interest rate of commercial bank on loan is 10% per annum will it be favorable for JENNY not to pay within the discount period and use the money as the source of financing? Discuss your answer briefly. 3. Compute the effective annual rate of trader's credit.with solu
Yoo, Incorporated, has arranged a line of credit that allows it to borrow up to $51 million at any time. The interest rate is 627 percent per month. Additionally, the company must deposit 5 percent of the amount borrowed in a noninterest-bearing account. The bank uses compound interest on its line-of-credit loans. If the company needs $27 million for 8 months, how much will it pay in interest? Multiple Choice $1.307,50417 $1,457,29019 $1619,200.22 $1.230.592.16) $1,384,41618
Busch Corporation has an existing loan in the amount of $6 millionwith an annual interest rate of 6.0%. The company provides an internal companyprepared financial statement to the bank under the loan agreement. Two competingbanks have offered to replace Busch Corporation’s existing loan agreement with a newone. United National Bank has offered to loan Busch $6 million at a rate of 5.0% butrequires Busch to provide financial statements that have been reviewed by a CPA firm.First City Bank has offered to loan Busch $6 million at a rate of 4.0% but requires Busch toprovide financial statements that have been audited by a CPA firm. Busch Corporation’scontroller approached a CPA firm and was given an estimated cost of $35,000 to performa review and $60,000 to perform an audit.a. Explain why the interest rate for the loan that requires a review report is lower thanthat for the loan that did not require a review. Explain why the interest rate for the loanthat requires an audit report is lower…
Summit Record Company is negotiating with two banks for a $134, 000 loan. Fidelity Bank requires a compensating balance of 18 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a compensating balance of 9 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 12 percent. Compensating balances will be subtracted from the $134,000 in determining the available funds in part a. a-1. Calculate the effective interest rate for Fidelity Bank and Southwest Bank. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. a-2. Which loan should Summit accept? multiple choice 1 Southwest Bank Correct Fidelity Bank b. Recompute the effective cost of interest, assuming that Summit ordinarily maintains $ 24, 120 at each bank in deposits that will serve as compensating balances. Note: Do not round intermediate calculations. Input…
Summit Record Company is negotiating with two banks for a $151,000 loan. Fidelity Bank requires a 28 percent compensating balance, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a 14 percent compensating balance, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 10 percent. Compensating balances will be subtracted from the $151,000 in determining the available funds in part a. Calculate the effective interest rate for Fidelity Bank and Southwest Bank. Which loan should Summit accept? Recompute the effective cost of interest, assuming that Summit ordinarily maintains $42,280 at each bank in deposits that will serve as compensating balances. Does your choice of banks change if the assumption in part b is correct?
Yoo, Incorporated, has arranged a line of credit that allows it to borrow up to $42 million at any time. The interest rate is 618 percent per month. Additionally, the company must deposit 4 percent of the amount borrowed in a noninterest bearing account. The bank uses compound interest on its line-of-credit loans. If the company needs $18 million for 7 months, how much will it pay in interest? Multiple Choice $925.47741 $793.266.35 $918,132.35 $826,319.11 $1,057,688.46

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