west.cengagenow.com/jiln/takeAssignment/takeAssignmentMaincko eBook Problem 16-3
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west.cengagenow.com/jiln/takeAssignment/takeAssignmentMaincko eBook Problem 16-3 Cost of Trade Credit and Bank Loan Lamar Lumber finandng. Assume 365 days in year for your caloulations. a. If Lamar dedides to forgo doscounts, how much additional credit could buys $8 million of materials (net of discounts) on terms of 3/5, net 70; and it currently pays after 5 days and takes discounts. Lamar pians to expand, which will require addtlonal obt ain? Write out your answer completedly. 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 dedirmal places. 15.64 % 15.64 % c. What would be the effective cost of that credik? Round your answer to two decimal places. 18.639 d. If the company could get the funds from a bank at a rate o 7%, interest paid monthly, based on a 365 day year, what would be the efective cost of the bank kan? Round your answer tot o decimal places. e. Should Lamar use bank debt or addtional trade crediR Partially CorrectExplanation / Answer
a)
Net discount =3% of 8000000=$240000
If lumar forgoes discount and refund the entire amount in 70 days then he will be able to hold the entire amount for 65 extra days.
Additional credit=Total discount forgone=$240000
b)
Nominal cost of credit= [ Discount percentage / (100- Discount Percentage) ] x [ 365Days / (credit is Outstanding-Discount Period) ]
Nominal cost of credit=(0.03/(1-0.03))*(365/(70-5))=17.37%
c)
Period rate=0.03/0.97=0.03093
Effective cost of credit= (1+period rate)^N
Effective cost of credit= (1+0.03093)^(365/65)=18.65%
d)
Period rate=0.07/12
Effective cost of Bank loan=((1+0.07/12)^12)-1=7.23%
e)
Since effective cost of bank loan(7.23%) is cheaper than effective cost of credit(18.65%), Lunar should take the bank Loan
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