Calculate the Interest Rate Associated with not taking the Discount from Each Supplier


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How much is the monthly repayment?


Question 1

Sam Smith has just been hired as the new corporate finance analyst at Infinities Investments and has received his first assignment. Sam is to take the $25 million in cash received from a recent divestiture and use part of these proceeds to retire an outstanding $10 million bond issue and the remainder to repurchase common stock in the company. However, the bond issue cannot be retired for another two years. If Sam can place the funds necessary to retire the $10 million debt into an account earning 6% p.a., compounded monthly, then how much of the $25 million remains to repurchase stock?


Question 2

Arial Enterprises is examining four possible suppliers of an important raw material used in its production process, both offering different credit terms. The products offered by each supplier are virtually identical. Supplier A is offering Credit Terms of 1/10 net 40; and Supplier B is offering 2/20 net 90; Supplier C 1/20 net 60 and Supplier D 3/10 net 75.

a) Calculate the interest rate associated with not taking the discount from each supplier.

b) If the firm needs short-term funds (currently available from its bank at 11%) and if each of the suppliers is viewed separately, then which, if any, of the suppliers’ cash discounts should the firm not take. Explain why.

c) Suppose that the firm could stretch its accounts payable to supplier A (net period only) by 20 days. How would this change your answer to Part b)?

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