Question
The Reynolds Corporation buys from its suppliers on terms of 2/19, net 50. Reynolds has not been utilizing the discounts offered and has been taking
The Reynolds Corporation buys from its suppliers on terms of 2/19, net 50. Reynolds has not been utilizing the discounts offered and has been taking 50 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 15 percent. The bank requires a 26 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. | Calculate the effective rate of interest if the company borrows from the bank. (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 | % |
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