Principles of Managerial Finance

660 PART 5 Short-Term Financial Decisions

LG1 LG2

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b. For each of the sets of credit terms in part a,calculate the number of days

until full payment is due for invoices dated March 12.

c. For each of the sets of credit terms, calculate the cost of giving up the cash

discount.

d. If the firm’s cost of short-term financing is 8%, what would you recommend

in regard to taking the discount or giving it up in each case?

15–4 Cash discount versus loan Erica Stone works in an accounts payable depart-

ment. She has attempted to convince her boss to take the discount on the 3/10

net 45 credit terms most suppliers offer, but her boss argues that giving up the

3% discount is less costly than a short-term loan at 14%. Prove to whoever is

wrong that the other is correct.

15–5 Cash discount decisions Prairie Manufacturing has four possible suppliers, all

of whom offer different credit terms. Except for the differences in credit terms,

their products and services are virtually identical. The credit terms offered by

these suppliers are shown in the following table.

a. Calculate the approximatecost of giving up the cash discount from each

supplier.

b. If the firm needs short-term funds, which are currently available from its

commercial bank at 16%, and if each of the suppliers is viewed separately,

which, if any, of the suppliers’ cash discounts should the firm give up?

Explain why.

c. What impact, if any, would the fact that the firm could stretch its accounts

payable (net period only) by 30 days from supplier M have on your answer in

part brelative to this supplier?

15–6 Changing payment cycle Upon accepting the position of chief executive officer

and chairman of Reeves Machinery, Frank Cheney changed the firm’s weekly

payday from Monday afternoon to the following Friday afternoon. The firm’s

weekly payroll was $10 million, and the cost of short-term funds was 13%. If

the effect of this change was to delay check clearing by 1 week, what annualsav-

ings, if any, were realized?

15–7 Spontaneous sources of funds, accruals When Tallman Haberdashery, Inc.,

merged with Meyers Men’s Suits, Inc., Tallman’s employees were switched from

a weekly to a bi-weekly pay period. Tallman’s weekly payroll amounted to

Supplier Credit terms

J 1/10 net 30 EOM

K 2/20 net 80 EOM

L 1/20 net 60 EOM

M 3/10 net 55 EOM