The Reynolds Company buys from its suppliers on terms of 3/10, net 46. Reynolds has not been utilizing the discount offered and has been taking 58 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 18 percent. The bank requires a 24 percent compensating balance on these loans. Current account balances would not be available to meet any of this required compensating balance.
a. Calculate the cost of not taking a cash discount. (Use 365 days in a year. Do not round intermediate calculations. Round the final answers to 2 decimal places.)
Cost of not taking a cash discount %
b. Calculate the effective rate of interest if the company borrow from the bank. (Use 365 days in a year. Do not round intermediate calculations. Round the final answers to 2 decimal places.)
c. Do you agree with Duke's proposal? Yes No