Question

COST OF TRADE CREDIT AND BANK LOAN

Lancaster Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 35; and it currently pays on the 5^th day and takes discounts. Lancaster plans to expand, which will require additional financing. Assume 365 days in year for your calculations.

1. 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.
   $
2. 
   
3. What would be the nominal cost of that credit? Do not round intermediate calculations. Round your answer to two decimal places.
   %
4. 
   
5. What would be the effective cost of that credit? Do not round intermediate calculations. Round your answer to two decimal places.
   %
6. 
   
7. If the company could get the funds from a bank at a rate of 11%, 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.
   %
8. Should Lancaster use bank debt or additional trade credit?
   -Select- Bank debt/ trade credit

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

ACCOUNTS latest - Microsoft Excel (Product Activation Failed) View Add-Ins File Home Insert Page Layout Formulas Data Review - 2x % Cut Dr General -11AA = = = U - D A Font C Wrap Text Merge Merge & Center Center Σ AutoSum : A Fill 2 m Sort & Find & SF $ - % % 4:0 .00 8. Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles 2 Clear Filter Editing Select Alignment Number Cells B C D E F G H I IK IL 399 Calibri E Copy Paste Format Painter B I Clipboard 11399 2 HZ A lancaster 400 401 402 403 404 405 406 407 408 409 410 411 412 AS COMPANY PAYS IN 5 DAYS AND GETS DISCOUNT, IF IT FORGOES DISCOUNT, IT CAN OBTAIN ADDITIONAL CREDIT SALES /365 DAYS X (TOTAL CREDIT DAYS - DISCOUNT DAYS) 8000000/365 X (35-5) = 657534.25 NOMINAL COST OF CREDIT ((discount /(1-discount))*(365 / (final date - early date)) ((0.03/(1-0.03))*(365/(35-5)) = 37.63% EFFECTIVE COST OF CREDIT ((1 + (discount /(1-discount))) ^(365 / (final date - early date)) )- 1 (1 + (0.03/(1-0.03))^(365/(35-5))) - 1= ((1+0.03093)^(365/30))- 1 = 0.44862188 44.86% 413 414 415 416 BANK LOAN AT 11%, COMPOUNDED MONTHLY (1 +0.12/12)^12-1 = 0.11571884 11.57% 417 AS THE EFFECTIVE COST OF BANK LOAN IS LOWER THAN THE COST OF TRADE CREDIT GO FOR BANK DEBT 418 419 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 Ovel BOU 120% I _ Rea .DC . * 0 ENG 00:23 20-11-2019