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west.cengager t.cengagenow.com/lrrn/takeAssignment/takeAssignmentMain.do Check My Work (o remaining) eBook Problem 16-3 Cost of Trade Credit and Bank Loarn Lamar Lumber buys $8 million of materials (net of discounts) on terms of 3 financing. Assume 365 days in year for your calculations. a· If Lamar decides to forgo dscounts, how much additional credit could it obtain, write out your answer ts) on terms of 3/5, net 70; and it currently pays after S days and takes discounts. Lamar plans to expand, which will require addtional ? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent. b. What would be the nominal cost of that credit? Round your answer to two decimal places. c. What would be the effective cost of that credit? Round your answer to two decim al places If the company could get the funds from, a bank at a rate of 7% interest paid monthly, based on a 365-day year, what would be the effective cost of the bank loan? Round your answer to two decimal places. d e. Should Lamar use bank debt or additional trade credit? Check My Work (o reaining) Problem 16.03 Question 7 of 10Explanation / Answer
d.
Anonymous
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06/26/15 at 08:09PM PDT
Purchases = $8,000,000;
terms = 3/5 net 70;
currently pays on Day 5 and takes discounts.
Forgoes discounts; additional credit = X
(365 / Discount days) x (Discount % / 1 - Disc %) = APR
365/70*0.03/0.97=15.642%
Effective costof trade credit = (1 + 3/97)365/65 - 1 = 1.1863- 1 = 18.63%.
Bank loan: 7%, interest paid monthly
EAR = (1 +0.07/12)12 - 1 = 1.0723 - 1 = 7.23%.
The effective cost of the bank loan is more than half the effective cost of the trade credit. Therefore , the bank loan should be used.
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