1) You are in charge of accounts payable decisions for a large manufacturer. You have a supplier who offers cash discount terms of 2/10 net 45 on all purchases. Passing up this discount is equivalent to borrowing from the supplier at 21.28%, while you are able to borrow short-term from your bank at 9%. However, the supplier relies on your firm for most of its sales and you could easily stretch the accounts payable period (net only) to 2/10 net 120. This allows you to effectively borrow from the supplier at 6.77%, saving your firm money when compared to the option of borrowing at 12% from the bank.
a. Should you stretch your accounts payable with this supplier? Why or why not?
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2) Which of the following conditions that would cause you to change your answer to part a? Explain your answer. Would either of these situations raise any ethical questions? Explain.
i. You watch Jim Cramer's Mad Money and learn that a small technology stock is almost certain to increase sharply in price in the next 30 days. However, to make the funds available to purchase the stock for your firm you need to stretch your payables from the supplier by at least 30 days.
ii. Your boss has informed you that the size of your holiday bonus depends on your ability to increase your firm's average payment period. Since the average payment period equals the accounts payable divided by average daily purchases, stretching payables will allow you to earn the bonus that you have been expecting.
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