Quantitative Problem: Adams Manufacturing Inc. buys $9.6 million of materials (n
ID: 2718078 • Letter: Q
Question
Quantitative Problem: Adams Manufacturing Inc. buys $9.6 million of materials (net of discounts) on terms of 2/10, net 50; and it currently pays after 10 days and takes the discounts. Adams plans to expand, which will require additional financing. If Adams decides to forgo discounts, how much additional credit could it obtain? Round your answer to the nearest cent. Do not round your intermediate calculations. Use 365 day in a year.
a.)What would be the nominal and effective cost of such a credit? Round your answer to 2 decimal places. Do not round intermediate calculations. Use 365 day in a year. Nominal cost:________ %
Effective cost________%
b.) If the company could receive the funds from a bank at a rate of 9.4%, interest paid monthly, based on a 365-day year, what would be the effective cost of the bank loan? Round your answer to 2 decimal places. Do not round intermediate calculations. _________%
Explanation / Answer
Adams Manufacturing Net Purchase $ 9,600,000 Discount @2% Gross purchase 9,795,918 Discount amount 195,918 So Adams needs to get credit of amt $ 195,918 Term 2/10, n50 Nominal cost of trade credit = [ Discount percentage / (100- Discount Percentage) ] x [ 365Days / (credit is Outstanding-Discount Period) Nominal Cost = 2/98*365/(50-10) = 18.62% Nominal Cost of credit =18.62% EAR = (1 + periodic rate)^N – 1 N=compunding periods Peridic rate =2/98=2.040% Periods per year=365/(50-10) =9.125 EAR = (1.0204)^9.125-1 = 20.23% So efferctive interest rate of credit = 20.23% Bank interest rate 9.4% , interest paid monthly EAR = (1 + periodic rate)^N – 1 N=12 EAR = (1+0.094/12)^12-1 = 9.82% So effective Bank rate =9.82%