Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

Judy's Fashions, Inc. purchases supplies from a single supplier on terms of 1/10, net 20. Currently, Judy takes the discount, but she believes she could extend the payment to 40 days without any adverse effects if she decided not to take the discount. Judy needs an additional $50,000 to support an expansion of fixed assets. This amount could be raised by making greater use of trade credit or by arranging a bank loan. The banker has offered to loan the money at 12 percent discount interest. Additionally, the bank requires an average compensating balance of 20 percent of the loan amount. Judy already has a commercial checking account at this bank which could be counted toward the compensating balance, but the required compensating balance amount is twice the amount that Judy would otherwise keep in the account. Which of the following statements is most correct?

a. The cost of using additional trade credit is approximately 36 percent.

b. Considering only the explicit costs, Judy should finance the expansion with the bank loan.

c. The cost of expanding trade credit using the approximation formula is less than the cost of the bank loan. However, the true cost of the trade credit when compounding is considered is greater than the cost of the bank loan.

d. The effective cost of the bank loan is decreased from 17.65 percent to 15.38 percent because Judy would hold a cash balance of one-half the compensating balance amount even if the loan were not taken.

e. If Judy had transaction balances that exceeded the compensating balance requirement, the effective cost of the bank loan would be 12.00 percent.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M944081

Have any Question? 


Related Questions in Basic Finance

The stock of bruin inc has an expected return of 22 percent

The stock of Bruin, Inc., has an expected return of 22 percent and a standard deviation of 35 percent. The stock of Wildcat Co. has an expected return of 14 percent and a standard deviation of 40 percent. The correlation ...

1 why do researchers use deception2 why do some people

1. Why do researchers use deception? 2. Why do some people object to the use of deception in research? 3. What four goals should a debriefing accomplish?

The unemployment rate in a city is 12 if 9 people from the

The unemployment rate in a city is 12%. If 9 people from the city are sampled at random, find the probability that fewer than 2 of them are unemployed. Carry your intermediate computations to at least four decimal places ...

Some machines require two registers for certain

Some machines require two registers for certain single-precision values. Suppose that the result of a multiplication of single-register quantities requires two consecutive registers, and when we divide a=b, the value of ...

Required for each of the following numbered items you are

Required For each of the following numbered items, you are to select the lettered item(s) that indicate(s) its effect(s) on the corporation's statements. If more than one effect is applicable to a particular item, be sur ...

Nicollette nbspjoined towson university basketball team

Nicollette  joined Towson University basketball team since summer 2015. On average, she is able to score 30% of the field goals. Assume she tries 15 field goals in a game. (a) Let X be the number of field goals that Mimi ...

At your discount brokerage firm it costs 995 per stock

At your discount brokerage firm, it costs $9.95 per stock trade. How much money do you need to buy 100 shares of Ralph Lauren (RL), which trades at $85.13?

Bills bakery expects earnings per share of 218 next year

Bill's Bakery expects earnings per share of $2.18 next year. Current book value is $3.9 per share. The appropriate discount rate for Bill's Bakery is 13 percent. Calculate the share price for Bill's Bakery if earnings gr ...

The period of a satellites motion around the earth is 36

The period of a satellite's motion around the earth is 36 hours, that is, it orbits the earth every 1.5 days. Determine the altitude of the satellite above the earth's surface in km.

According to mary goldberg the chance to invest in new

According to Mary Goldberg, the chance to invest in New World Explorations was "too good to pass up," and she lost $10,000. Why do you think so many people are taken in by get-rich-quick schemes?

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro