Your firm sells for cash only, but it is thinking ofoffering credit, allowing customers 90 days to pay. Customers understand the time valueof money, so they would all wait and pay on the 90th day. To carry these receivables, youwould have to borrow funds from your bank at a nominal 9%, daily compounding basedon a 360-day year. You want to increase your base prices by exactly enough to offset yourbank interest cost. To the closest whole percentage point, by how much should you raiseyour product prices?

Corporate Fin Focused Approach
5th Edition
ISBN:9781285660516
Author:EHRHARDT
Publisher:EHRHARDT
Chapter4: Time Value Of Money
Section: Chapter Questions
Problem 32P
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Your firm sells for cash only, but it is thinking of
offering credit, allowing customers 90 days to pay. Customers understand the time value
of money, so they would all wait and pay on the 90th day. To carry these receivables, you
would have to borrow funds from your bank at a nominal 9%, daily compounding based
on a 360-day year. You want to increase your base prices by exactly enough to offset your
bank interest cost. To the closest whole percentage point, by how much should you raise
your product prices?

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