The Reynolds Company buys from its suppliers on terms of 2/10, net 40. Reynolds has not been utilizing the discount offered and has been taking 55 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 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 required compensating balance. Do you agree with Mr. Duke's proposal?