Problem:
Lamar Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 55; and it currently pays after 5 days and takes discounts. Lamar plans to expand, which will require additional financing. Assume 365 days in year for your calculations.
Required:
Question 1: If Lamar decides to forgo discounts, how much additional credit could it obtain? Write out your answer completely. For example, 5 million should be entered as 5,000,000.
Question 2: What would be the nominal cost of that credit?
Question 3: What would be the effective cost of that credit?
Question 4: If the company could get the funds from a bank at a rate of 11%, interest paid monthly, based on a 365-day year, what would be the effective cost of the bank loan?
Note: Explain the solution in detail.