A Firm Is Offered Credit Terms of 1/10 Net 45

question 54

Multiple Choice

A firm is offered credit terms of 1/10 net 45 EOM by a major supplier. The firm has determined that it can stretch the credit period (net period only) by 25 days without damaging its credit standing with the supplier. Assuming the firm needs short-term financing and can borrow from the bank on a line of credit at an interest rate of 14 percent, the firm should ________.

• A) give up the cash discount and finance the purchase with the line of credit
• B) give up the cash discount and pay on the 70th day after the date of sale
• C) take the cash discount and pay on the first day of the cash discount period
• D) take the cash discount and finance the purchase with the line of credit, the cheaper source of funds

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Definitions:

Xerox

A multinational corporation known for its document technology and digital print solutions, often used synonymously with photocopying.

IBM

A multinational technology and consulting company known for its hardware, software, and extensive range of computing services.

Synthetic Lease

A financing method allowing a company to lease an asset while keeping it off its balance sheet, ensuring both tax advantages and off-balance-sheet financing.

Operating Lease

A contract that allows for the use of an asset but does not convey rights of ownership of the asset.