The Reynolds Corporation buys from its suppliers on terms of 2/10, net 55. Reynolds has not been utilizing 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 the discounts offered. Duke proposes that the company borrow from its bank at a stated rate of 14 percent. The bank requires a 20 percent compensating balance on these loans. Current account balances would not be available to meet any of this compensating balance requirement. Do you agree with Duke's proposal?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter16: Working Capital Policy And Short-term Financing
Section: Chapter Questions
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The Reynolds Corporation buys from its suppliers on terms of 2/10, net 55. Reynolds has not been
utilizing 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 the
discounts offered. Duke proposes that the company borrow from its bank at a stated rate of 14
percent. The bank requires a 20 percent compensating balance on these loans. Current account
balances would not be available to meet any of this compensating balance requirement.
Do you agree with Duke's proposal?
Transcribed Image Text:The Reynolds Corporation buys from its suppliers on terms of 2/10, net 55. Reynolds has not been utilizing 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 the discounts offered. Duke proposes that the company borrow from its bank at a stated rate of 14 percent. The bank requires a 20 percent compensating balance on these loans. Current account balances would not be available to meet any of this compensating balance requirement. Do you agree with Duke's proposal?
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