Business, 16.05.2020 15:57 Ericabarnes114
Hand-to-Mouth (H2M) is currently cash-constrained, and must make a decision about whether to delay paying one of its suppliers, or take out a loan. They owe the supplier $ 10 comma 000 with terms of 2/10 Net 40, so the supplier will give them a 2 % discount if they pay by today (when the discount period expires). Alternatively, they can pay the full $ 10 comma 000 in one month when the invoice is due. H2M is considering three options:
Alternative A: Forgo the discount on its trade credit agreement, wait and pay the full $ 10 comma 000 in one month.
Alternative B: Borrow the money needed to pay its supplier today from Bank A, which has offered a one-month loan at an APR of 12 %. The bank will require a (no-interest) compensating balance of 5 % of the face value of the loan and will charge a $ 100 loan origination fee. Because H2M has no cash, it will need to borrow the funds to cover these additional amounts as well.
Alternative C: Borrow the money needed to pay its supplier today from Bank B, which has offered a one-month loan at an APR of 15 %. The loan has a 1 % loan origination fee, which again H2M will need to borrow to cover.
a. Alternative A: The effective annual cost is %. (Round to two decimal places.)
b. Alternative B: The effective annual rate is %. (Round to two decimal places.)
c. Alternative C: The effective annual rate is %. (Round to two decimal places.)
(Select the best choice below.)
A. Alternative A, with the lowest effective annual rate, is the best option for Hand-to-Mouth.
B. Alternative B, with the lowest effective annual rate, is the best option for Hand-to-Mouth.
C. Alternative C, with the lowest effective annual rate, is the best option for Hand-to-Mouth.
D. All the alternatives are equivalent.
Answers: 2
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Hand-to-Mouth (H2M) is currently cash-constrained, and must make a decision about whether to delay p...
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