Ask Question, Ask an Expert


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

Fat cat incorporated has 16124 in total assets depreciation

Fat Cat Incorporated has $16,124 in total assets, depreciation of $2,072, and interest of $3,001. The total asset turnover rate is 1.8. Earnings before interest and taxes is equal to 35 percent of sales. What is the cash ...

The feds impact on the housing market in periods when home

The Fed's Impact on the Housing Market: In periods when home prices declined substantially, some homeowners blamed the Fed. In other periods, when home prices increased, homeowners gave credit to the Fed. How can the Fed ...

Sitttsl309 amp sitttsl310 source airfares for domestic

SITTTSL309 & SITTTSL310 Source airfares for domestic flights & Construct normal international airfares Learning Outline - Within this resource, you will be covering the following key topics: Interpret domestic airfare in ...

Will changes in technology affect the rate at which the

Will changes in technology affect the rate at which the short-run aggregate supply curve shifts in response to an output gap? Why or why not? Provide some specific examples of how technology will change the rate of adjus ...

Suppose there is an unexpected slowdown in the rate of

Suppose there is an unexpected slowdown in the rate of productivity growth in the economy so that forecasters consistently overestimate the growth rate of GDP. If the central bank bases its policy decisions on the consen ...

Financial crisis discussion postwhat were some of the

Financial Crisis Discussion Post What were some of the credit risks that arose from the 2008 financial crisis? How were banks affected by the credit risks? How were individuals and businesses affected by the credit risks ...

Your company has just sold a piece of property for 500000

Your company has just sold a piece of property for $500,000, but under the sales agreement, it won't receive the $500,000 until ten years from today. What is the present value of $500,000 to be received ten years from to ...

Financial intermediation look in a business periodical for

Financial Intermediation: Look in a business periodical for news about a recent financial transaction involving two financial institutions. For this transaction, determine the following: a. How will each institution's ba ...

You are given a notional sgd 100000 to invest on the

You are given a notional SGD 100,000 to invest on the Singapore stock market in shares selected from the list of shares in the FTSE ST ALL Share index (listed on the SGX). You need to split your investment 50:50 between ...

Consider two risky stocks their variances are different

Consider two risky stocks (their variances are different from zero), which are perfectly negatively correlated, i.e., their correlation is equal to -1. Is it possible to combine these two stocks and form a zero-risk port ...

  • 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

A cola-dispensing machine is set to dispense 9 ounces of

A cola-dispensing machine is set to dispense 9 ounces of cola per cup, with a standard deviation of 1.0 ounce. The manuf

What is marketingbullwhat is marketing think back to your

What is Marketing? • "What is marketing"? Think back to your impressions before you started this class versus how you

Question -your client david smith runs a small it

QUESTION - Your client, David Smith runs a small IT consulting business specialising in computer software and techno

Inspection of a random sample of 22 aircraft showed that 15

Inspection of a random sample of 22 aircraft showed that 15 needed repairs to fix a wiring problem that might compromise

Effective hrmquestionhow can an effective hrm system help

Effective HRM Question How can an effective HRM system help facilitate the achievement of an organization's strate