Question: Exceptional Enterprises offers terms of net 60. Management considers introducing a cash discount in order to encourage earlier payments. The discount period would be 15 days.
(a) Find the discount that would have to be offered if management wants the cost of foregoing the discount to equal the current 18- percent interest rate on bank loans.
(b) Is it reasonable for management to determine the size of the cash discount offered by reference to the current bank borrowing rate?
(c) What interest rate would management have to charge on overdue accounts in order to discourage customers from stretching their payables?