Cost of Trade Credit and Bank Loan

Problem 163

Cost of Trade Credit and Bank Loan

Lamar Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 30; and it

currently pays after 5 days and takes discounts. Lamar plans to expand, which will require

additional financing. Assume 365 days in year for your calculations.

a. If Lamar 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? Round your answer to two decimal places.

% ?

c. What would be the effective cost of that credit? Round your answer to two decimal places.

% ?

d. If the company could get the funds from a bank at a rate of 10%, interest paid monthly,

based on a 365day

year, what would be the effective cost of the bank loan? Round your

answer to two decimal places.

% ?

e. Should Lamar use bank debt or  ?