In: Finance

# The Reynolds Corporation buys from its suppliers on terms of 2/18, net 50. Reynolds has not...

The Reynolds Corporation buys from its suppliers on terms of 2/18, net 50. Reynolds has not been utilizing the discounts offered and has been taking 50 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 18 percent. The bank requires a 15 percent compensating balance on these loans. Current account balances would not be available to meet any of this compensating balance requirement.

a. Calculate the cost of not taking a cash discount. (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 cost of not taking a cash discount %

b. What is the effective rate of interest on the bank loan? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 Effective rate of interest %

## Solutions

##### Expert Solution

Let the credit obtained from supplier be $100,000  Amount Amount If cash discount not taken Amount repayable at the end of 50 days$100,000.00 Amount of loan to be taken including compensation reserve (100000*100/85) $117,647.06 Interest payable on such loan (117647.06*18%)$21,176.47 % of expense incurred for 100000 (21176.47/100000) 21.18% If cash discount taken Amount repayable at the end of 18 days (100000*98%) $98,000.00 Amount of loan to be taken including compensation reserve (98000*100/85)$115,294.12 Interest payable on such loan (115294*18%) $20,752.94 Amount of discount received for prepayment$(2,000.00) Amount of interest payable for additional 32 days i.e 50-18 days (115294.12*32/360*18%) $1,844.71 Total expense incured on credit obtained from suppliers$20,597.65 % of expense incurred for 100000 (21176.47/100000) 20.60%

Solution (a) The cost of not taking the cash discount is less than 1% of total credit obtained

Solution (b) The effective rate of interest on the bank loan is 21.18%

## Related Solutions

##### The Reynolds Corporation buys from its suppliers on terms of 2/18, net 50. Reynolds has not...
The Reynolds Corporation buys from its suppliers on terms of 2/18, net 50. Reynolds has not been utilizing the discounts offered and has been taking 50 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 18 percent. The bank requires a 15 percent compensating balance on these loans. Current account balances would...
##### The Reynolds Corporation buys from its suppliers on terms of 3/18, net 55. Reynolds has not...
The Reynolds Corporation buys from its suppliers on terms of 3/18, 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 18 percent. The bank requires a 10 percent compensating balance on these loans. Current account balances would not...
##### The Reynolds Corporation buys from its suppliers on terms of 2/17, net 65. Reynolds has not...
The Reynolds Corporation buys from its suppliers on terms of 2/17, net 65. Reynolds has not been utilizing the discounts offered and has been taking 65 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 15 percent. The bank requires a 10 percent compensating balance on these loans. Current account balances would not...
##### The Reynolds Corporation buys from its suppliers on terms of 2/11, net 60. Reynolds has not...
The Reynolds Corporation buys from its suppliers on terms of 2/11, net 60. Reynolds has not been utilizing the discounts offered and has been taking 60 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 16 percent. The bank requires a 12 percent compensating balance on these loans. Current account balances would not...
##### The Reynolds Company buys from its suppliers on terms of 2/10, net 58. Reynolds has not...
The Reynolds Company buys from its suppliers on terms of 2/10, net 58. Reynolds has not been utilizing the discount offered and has been taking 70 days to pay its bills. The suppliers seem to accept this payment pattern, and Reynold’s credit rating has not been hurt. Mr. Duke, Reynolds Company’s vice-president, has suggested that the company begin to take the discount offered. Mr. Duke proposes the company borrow from its bank at a stated rate of 11 percent. The...
##### Your company’s primary supplier has decided to change its credit terms from 1/10 net 60 to 2/10 net 30.
Your company’s primary supplier has decided to change its credit terms from 1/10 net 60 to 2/10 net 30. Assuming that you can borrow from the bank at a stated interest rate of 9.5%, which of the following statements is true?a) Your company shouldn’t take the discount under the new terms; you did take the discount under the old terms.b) Your company should take the discount under the new terms; you didn’t take the discount under the old terms.c) Your...
##### June 2Romeo received an $18,000 invoice from one of its suppliers. Terms were 2/10 n/30, FOB... June 2Romeo received an$18,000 invoice from one of its suppliers. Terms were 2/10 n/30, FOB shipping point. 3Romeo paid the freight bill amounting to $2,000. 4Romeo returned$2,500 of the merchandise billed on June 2 because it was defective. 5Romeo sold $8,000 of merchandise on account, terms 3/15 n/30. The cost of the merchandise sold was$5,100. 10Romeo paid the invoice dated June 2, less the return and the discount. 15A customer returned $2,500 of merchandise sold on June... ##### June 2Romeo received an$18,000 invoice from one of its suppliers. Terms were 2/10 n/30, FOB...
June 2Romeo received an $18,000 invoice from one of its suppliers. Terms were 2/10 n/30, FOB shipping point. 3Romeo paid the freight bill amounting to$2,000. 4Romeo returned $2,500 of the merchandise billed on June 2 because it was defective. 5Romeo sold$8,000 of merchandise on account, terms 3/15 n/30. The cost of the merchandise sold was $5,100. 10Romeo paid the invoice dated June 2, less the return and the discount. 15A customer returned$2,500 of merchandise sold on June...