Question

COST OF TRADE CREDIT AND BANK LOAN Lancaster Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 65; and it currently pays on the 5th day and takes discounts. Lancaster plans to expand, which will require additional financing. Assume 365 days in year for your calculations. a. If Lancaster decides to forgo discounts, how much additional credit could it obtain? 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? Do not round intermediate calculations. Round your answer to two decimal places. % c. What would be the effective cost of that credit? Do not round intermediate calculations. Round your answer to two decimal places. % d. If the company could get the funds from a bank at a rate of 9%, interest paid monthly, based on a 365-day year, what would be the effective cost of the bank loan? Do not round intermediate calculations. Round your answer to two decimal places. % e. Should Lancaster use bank debt or additional trade credit? -Select-

Answer 1

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- 2x Σ AutoSum : A Fill Clear Sort & Filter Editing Find & Select ACCOUNTS latest - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri -11AA = = = Dr Wrap Text General E Copy Paste B I U - D A E E E s FMerce Merge & Center Center $ - % % Format Painter 4.0 .00 8. Conditional Format Cell Insert Delete Format Formatting as Table Styles Clipboard Font Alignment Number Styles Cells IK308 IA IB IC I D IE IF IG ΤΗ III 289 290 a AS COMPANY PAYS IN 5 DAYS AND GETS DISCOUNT, IF IT FORGOES DISCOUNT, IT CAN OBTAIN ADDITIONAL CREDIT 291 SALES /365 DAYS X (TOTAL CREDIT DAYS - DISCOUNT DAYS) 292 8000000/365 X (65-5) = 1315068.49 IM 293 NOMINAL COST OF CREDIT ((discount/(1-discount))*(365 / (final date - early date)) ((0.03/(1-0.03))*(365/(65-5)) = 18.81% EFFECTIVE COST OF CREDIT ((1 + (discount/(1-discount))) ^(365 / (final date - early date)) )- 1 (1 + (0.03/(1-0.03))^(365/(65-5))) - 1= ((1+0.03093)^6.08333)- 1 = 0.20358703 20.36% 294 b 295 296 297 298 C 299 300 301 302 303 d 304 305 306 e 307 308 200 BANK LOAN AT 9%, COMPOUNDED MONTHLY (1 +0.09/12)^12-1 = 0.0938069 9.38% AS THE EFFECTIVE COST OF BANK LOAN IS LOWER THAN THE COST OF TRADE CREDIT GO FOR BANK DEBT FIFO budget 45 days cycle ROE, BV MV ratio VARIANCE BEP, OL FL ratios DETROIT float B-S profit loss SALES BUDGET dupont CASH BUDGET ferences: R46 DIFF ANALYSIS BO! ovel 120% I Rea 1 + 2. B 9 * ENG 24-11-2019