Parsons Company has a cash flow problem. The company owes its suppliers 300,000 on credit
terms of 2/10 net 40, but Parsons doesn't have the cash to pay during the discount period. Parsons,
however, can borrow the 300,000 at annual rate of 24.
Should Parsons borrow the money to pay
its accounts payable?
A) Yes, the effective cost of forgoing the discount is greater than 24.
B) No, the effective cost of forgoing the discount is equal to 24, and there are transactions costs
associated with borrowing.
C) No, additional borrowing will cost more for interest (60,000 per year) than the discount is
worth.
D) It doesn't matter because the present value of the cost of borrowing is exactly equal to the
amount of the discount for paying within 10 days.
Question 2
A firm's cash position would most likely be hurt by
A) increasing the net profit margin. B) retiring outstanding debt.
C) decreasing excess inventory. D) establishing stricter (shorter) credit terms
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