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Problem:

A company buys $10 million of materials (net of discount) on terms 3/5, net 60, and it currently pays on the 5th day & takes discounts. The company plans to expand, which will mean add'l financing.

Required:

Question 1: If the company decides to forgo discounts, could it obtain much add'l credit?

Question 2: What would be the nominal & effective cost of that credit?

Question 3: What would be the effective cost of the bank loan if the company could get the funds from a bank at a rate of 8% and if the interest was paid monthly? All of this should be based on 365 day year.

Question 4: Should the company use bank debt or add'l trade credit? Why.

Please explain in detail and also provide step by step solution of each question.

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M91146142

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