C+ Notes' business is booming, and it needs to raise more capital.The company purchases supplies from a single supplier on terms of 1/10, net 20, and it currently takes the discount.One way of getting the needed funds would be to forgo the discount, and C+'s owner believes she could delay payment to 40 days without adverse effects.As an alternative, C+ could borrow from its bank at a rate of 12 percent, annual compounding, but with discount interest.Additionally, the bank would require a compensating balance of 20 percent of the loan amount.What is the difference between the EARs of the two financing sources?
A)4.83%
B)5.25%
C)7.60%
D)9.44%
E)12.12%

Question

Quizplus · Accepted Answer

The EAR of the trade discount is 36.5%, and the EAR of the bank loan is 12.68%. The difference is 36.5% - 12.68% = 23.82%.

C+ Notes' Business Is Booming, and It Needs to Raise