Gonzales Company
Gonzales Company
Gonzales Company
purchases. The standard industry credit terms offered by all its suppliers are 2/10, net 30
days, and the firm pays in 30 days. The new CFO is considering borrowing from its bank,
using short-term notes payable, and then taking discounts. The firm wants to determine
the effect of this policy change on its net income. Its net purchases are $11,760 per day,
using a 365-day year. The interest rate on the notes payable is 10%, and the tax rate is
40%. If the firm implements the plan, what is the expected change in net income after
taxes? a. –$23,520 b. –$31,440 c. +$23,520 d. +$38,448 e. +$69,888
Calculate financing amount in notes payable and interest cost. The firm will need
to borrow the difference in notes payable.
$352,800 – $117,600 = $235,200.
The additional interest cost is $235,200 0.10 = $23,520.
*Any EBIT can be used, since the difference in EBIT from the two policies is zero.