Stewart's suppliers are fed up and will not continue selling to Stewart unless Stewart begins making prompt payments (that is, paying in 30 days or less). The firm is going to have to reduce its level of accounts payable, either to an amount that is equal to 30 days purchases (if it does not take discounts) or to 10 days purchases (if it decides to take discounts). Management has decided to obtain the needed funds by borrowing on an additional 1-year note payable (call this a current liability) from its bank at a rate of 16%, discount interest, with a 15% compensating balance required. The cash currently held by Stewart is needed for transactions, so it cannot be used as part of the compensating balance. So, the issue now facing the company is this: How much trade credit should it use, and how large a loan should it obtain from its bank? a. How large would the accounts payable balance be if Stewart takes discounts? If it does not take discounts and pays in 30 days? Input Data Discount, if taken 1% Days actually taken to make payment 50 Term of discount (days) 10 Interest rate on bank loan 16% Payment due (days) 30 Required compensating balance 15% Accounting days/year 360 Purchases per day = Old A/P / old days until payment = 2,500,000 / 50 = $ 50,000.00 Accounts payables = Term of discount (days) x Purchases per day = Accounts payables if take discounts = 10 x $ 50,000 = $ 500,000 Accounts payables if don't take discounts = 30 x $ 50,000 = $ 1,500,000