A Firm Faces a Liquidity Crunch and Must Decide Between

question 104

Multiple Choice

A firm faces a liquidity crunch and must decide between borrowing from a bank at 12% interest and stretching its payables for one quarter.If it stretches the payables it will forgo a 2% discount for timely payment.Based solely on cash flows, which would you suggest?

• A)Stretching saves the firm approximately 8% per year
• B)Use the bank loan; forgoing a cash discount is costly
• C)Stretch the payables and finance at a savings of approximately 3.75% annually
• D)Use the bank loan because it represents simple interest

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