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Problem 4: Cost of Trade Credit and Bank Loan XYZ Inc. buys $10 million of materials (net of discounts) on terms of 3/5, net 60,
Problem 4: Cost of Trade Credit and Bank Loan |
XYZ Inc. buys $10 million of materials (net of discounts) on terms of 3/5, net 60, and it currently pays on the 5th day and takes discounts. XYZ plans to expand, which will mean additional financing. |
1. If XYZ decides to forgo discounts, could it obtain much additional credit? |
2. What would be the nominal and effective cost of that credit? |
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 percent and if the interest was paid monthly? All of this should be based on a 365-day year. |
4. Should XYZ use bank debt or additional trade credit? Explain. |
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