19. The Ogden Timber Company buys from its suppliers on terms of 2/10, net 35.
Ogden has not been utilizing the discount offered and has been taking 50 days
to pay its bills. The suppliers seem to accept this payment pattern, and Ogden’s
credit rating has not been hurt.
Mr. Wood, Ogden Timber Company’s vice president, has suggested that the
company begin to take the discount offered. Mr. Wood proposes that the company
borrow from its bank at a stated rate of 15 percent. The bank requires a
25 percent compensating balance on these loans. Current account balances
would not be available to meet any of this compensating balance requirement.
Do you agree with Mr. Wood’s proposal?