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Cost of forgoing cash discount

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Paul Stone can get 3/15, net 65 from his suppliers. Paul would like to delay paying the suppliers as long as possible because his cash account balance is very low, but his Dad, a famous financial expert, recommends that he borrow from his local bank at 10% and pay early to take advantage of the discount. Which of the following should Paul do?

a. Pay within 15 days, borrowing from the bank, if necessary, to get the money.

b. Pay on the 16th day

c. Pay on the 65th day

d. Send a hit man after his Dad

If a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC).

a. True

b. False

An increase in a current asset must be accompanied by a corresponding increase in a current liability.

a. True

b. False

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This provides the steps to calculate the cost of forgoing cash discount

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Paul Stone can get 3/15, net 65 from his suppliers. Paul would like to delay paying the suppliers as long as possible because his cash account balance is very low, but his Dad, a famous financial expert, recommends that he borrow from his local bank at 10% and pay early to take advantage of the discount. Which of the following should Paul do?

Let us calculate the cost of forgoing ...

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