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.