9.Simple Simon's Bakery purchases supplies onterms of 1/10, Net 25. If Simple Simon's choosesto take the discount offered, it must obtain abank loan to meet its short-term financingneeds. A local bank has quoted Simple Simon'sowner an interest rate of 12% on borrowed fundsand no origination fees. Should Simple Simon'senter the loan agreement with the bank in orderto begin taking the discount?Yes, because the bank loan is cheaper thantheir trade creditNo, because 12% isn't a high enough returnfor Simple Simon'sYes, because the trade credit is cheaperNo, because the bank loan is moreexpensive than their trade credit

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Asked Nov 26, 2019
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Please show all equations and work as needed. If possible, please type the work so that it may be copied and pasted. Thank you.

9.
Simple Simon's Bakery purchases supplies on
terms of 1/10, Net 25. If Simple Simon's chooses
to take the discount offered, it must obtain a
bank loan to meet its short-term financing
needs. A local bank has quoted Simple Simon's
owner an interest rate of 12% on borrowed funds
and no origination fees. Should Simple Simon's
enter the loan agreement with the bank in order
to begin taking the discount?
Yes, because the bank loan is cheaper than
their trade credit
No, because 12% isn't a high enough return
for Simple Simon's
Yes, because the trade credit is cheaper
No, because the bank loan is more
expensive than their trade credit
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9. Simple Simon's Bakery purchases supplies on terms of 1/10, Net 25. If Simple Simon's chooses to take the discount offered, it must obtain a bank loan to meet its short-term financing needs. A local bank has quoted Simple Simon's owner an interest rate of 12% on borrowed funds and no origination fees. Should Simple Simon's enter the loan agreement with the bank in order to begin taking the discount? Yes, because the bank loan is cheaper than their trade credit No, because 12% isn't a high enough return for Simple Simon's Yes, because the trade credit is cheaper No, because the bank loan is more expensive than their trade credit

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Expert Answer

Step 1

Calculation of Cost of Trade Credit:

The cost of trade credit is 27.71%.

...
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Actual Days-DiscountDays -1 Discount Rate Cost of Trade Credit 1-Discount Rate 365 25-10 -1 1% 1-1% 0.277057 or27.71%

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