Quantitative Problem: Adams Manufacturing Inc. buys $10.7 million of materials (
ID: 2799101 • Letter: Q
Question
Quantitative Problem: Adams Manufacturing Inc. buys $10.7 million of materials (net of discounts) on terms of 2/10, net 60; 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 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 If the company could receive the funds from a bank at a rate of 7.6% interest paid monthly based on a 365-day year what would be the effective cost of th an an Round your answer to 2 decimal places. Do not round intermediate calculations Should Adams use bank debt or additional trade credit? -Select-Explanation / Answer
Answer )
Credit Obtained = $ 10.7 million * 2 % = $ 214000
Nominal cost = 2/114 * 365/50 = 12.81%
Effective cost = (1 + 2/114)^(365/50) - 1 = 20.24%
Effective cost on bank loan = (1+7.6%/12)^12 - 1 = 9.00%
Adams use bank debt due to low cost