A Firm Must Decide Between Borrowing from a Bank at 12

question 63

Multiple Choice

A firm must decide between borrowing from a bank at 12% interest or 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 is the cheaper solution?

• 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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Definitions:

Company's Records

Documentation and books kept by a company containing important information such as financial transactions, contracts, and employee records.

Bank Statement

A document issued by a bank summarizing the transactions that have occurred over a given period in a bank account.

Internal Control

Actions and procedures a company adopts to ensure the fidelity of its financial and accounting narratives, boost accountability, and inhibit fraudulence.

Information And Communication

The processes and tools used to collect, transmit, store, and process data to facilitate decision-making and coordination within an organization.