C3-59 Cash Flow Case: No Payments! No Interest! No Money Down!!! The ad screams: BUY NOW AND PAY NOTHING UNTIL NEXT YEAR! NO INTEREST! Such promotional campaigns have appeared with increasing frequency in recent years often offered by companies such as Best Buy and Bailey's Furniture. They may offer 6 months or more of interest-free loans. For purchases made in November or December, they may offer 14 months with no payments or interest, thus permitting purchasers to defer any cash outlays until early next year. However, if full payment is not made by the specified date, interest is typically due from the original date of purchase, often at 18 to 24 percent. Please answer the following questions about this practice: a. Why would a company be willing to allow customers to delay payment for 6 to 14 months and not charge interest? b. If a company permits customers who purchase merchandise in December of the current year to defer payment until January of the next year, how does the company pay its bills in the meantime? Do you think the retail company extends credit itself, or might it enter into some type of arrangement with a financial institution? What type of credit arrangement do you think might be used? c. Best Buy has a fiscal year ending at the end of February. Why would Best Buy be unlikely to make this type of offer near its year-end? d. Assume you are a customer about to purchase $2,500 of furniture and can choose between purchasing it at either of two stores having special sales: Zippy Furniture Sales: 14 months with no payments or interest. If the full amount is not paid by the end of that time, interest must be paid from the date of purchase at 24% annual rate. Zappy Home Interiors: All merchandise in sale for 20% off, cash must be paid at the time of purchase. Although you have the cash to make the purchase, you were hoping to invest that cash in the stock market and earn a 12% annual return. Which alternative would you choose? Why? e. Suppose you were choosing between the two alternatives, and you would not have needed the cash for 18 months. However, you can get a bank line of credit any time at a 10% annual rate. What actions would you take? Why? C3-59 Cash Flow Case: No Payments! No Interest! No Money Down!!! The ad screams: BUY NOW AND PAY NOTHING UNTIL NEXT YEAR! NO INTEREST! Such promotional campaigns have appeared with increasing frequency in recent years often offered by companies such as Best Buy and Bailey's Furniture. They may offer 6 months or more of interest-free loans. For purchases made in November or December, they may offer 14 months with no payments or interest, thus permitting purchasers to defer any cash outlays until early next year. However, if full payment is not made by the specified date, interest is typically due from the original date of purchase, often at 18 to 24 percent. Please answer the following questions about this practice: a. Why would a company be willing to allow customers to delay payment for 6 to 14 months and not charge interest? b. If a company permits customers who purchase merchandise in December of the current year to defer payment until January of the next year, how does the company pay its bills in the meantime? Do you think the retail company extends credit itself, or might it enter into some type of arrangement with a financial institution? What type of credit arrangement do you think might be used? c. Best Buy has a fiscal year ending at the end of February. Why would Best Buy be unlikely to make this type of offer near its year-end? d. Assume you are a customer about to purchase $2,500 of furniture and can choose between purchasing it at either of two stores having special sales: Zippy Furniture Sales: 14 months with no payments or interest. If the full amount is not paid by the end of that time, interest must be paid from the date of purchase at 24% annual rate. Zappy Home Interiors: All merchandise in sale for 20% off, cash must be paid at the time of purchase. Although you have the cash to make the purchase, you were hoping to invest that cash in the stock market and earn a 12% annual return. Which alternative would you choose? Why? e. Suppose you were choosing between the two alternatives, and you would not have needed the cash for 18 months. However, you can get a bank line of credit any time at a 10% annual rate. What actions would you take? Why
