What is the annual rate of interest

Assignment Help Accounting Basics

Reference no: EM132813520

Question

Silver Appliances purchases $21.0 million of inventory from its suppliers every year. They are looking to finance $1,428,000 for 60 days, to cover the purchase of inventory for the Christmas season. (They need $1,428,000 for 60 days.) Three alternatives are being considered:

-Increase accounts payable: Supplier's terms are 1/10 net 40 and Silver Appliances has traditionally taken advantage of the discount, paying their suppliers in 10 days. If Silver Appliances chooses to forego the discount, they would pay their suppliers in 40 days, instead of 10.
-Highland Bank will let Silver Appliances borrow money, but they require a compensating balance of 15.0 percent of the loan balance be maintained by Silver Appliances at all times. (There are currently no funds on deposit with Highland Bank that would count toward compensating balances.) They will charge 10.00 percent interest per annum for the loan. (Remember: calculate interest for just 60 days, not a full year.)

-Issue commercial paper for 60 days, sold at a discounted price of 98.067 percent of the maturity value.

Required:
(Round all dollar figures to zero (0) decimal places (e.g. $123,456) and all percentages to two (2) decimal places (e.g. 12.34%).

If Silver Appliances pays their suppliers in 40 days:

-Assuming annual purchases of inventory remain at $21.0 million, what will be the increase in accounts payable?
New Accounts Payable
Old Accounts Payable

Difference in Accounts Payable

- What is the annual interest rate associated with foregoing the discount? %If Silver Appliances decides to use a loan from Highland Bank:

How much would they have to borrow?

How much would they pay, in dollars, in interest?

How much would they be able to use?

What is the annual rate of interest?

What is the annual interest rate associated with the Commercial Paper?

Which alternative should Silver Appliances choose?

Reference no: EM132813520

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