1. Suppose a firm makes purchases of $3.6 million per year under terms of 2/10, net 30 and takes discounts
a) What is the average amount of accounts payables net of discounts? ( assume that the $3.6 million of purchases is net of discounts that is gross purchases are $3,673,469 and discounts are $73,469. Also use 360 days in a year)
b) Is there a cost of the trade credit the firm uses?
c) If the firm did not take discounts and it paid on time, what would be its average payables and the APR and EAR of this non-free trade credit? Assume the firm records accounts payable net of discounts.
d) What would be the APR and EAR of not taking discounts if the firm can stretch its payments to 40 days?
2. Gallinger Corporation projects an increase in sales from $1.5 million to $2 million but it needs an additional $300,000 of current qssets to support this expansion. The money can be obtained from the bank at an investment rate of 13% discount interest; no compensating balance is required. Alternatively Gallinger can finance the expansion by no longer taking discounts thus increasing accounts payable. Gallinger purchases under term 2/10, net 30, but it can delay payment for an additional 35 days paying in 65 days and thus becoming 35 days past due without a penalty because of its suppliers current excess capacity problems
a) Based strictly on effective annual interest rate comparisons, how should Gallinger finance its expansion?
b) What additional qualitative factors should Gallinger consider before reaching a decision?
*****Please show me the work on how you got your answer***************
