Hand-to-Mouth is currently cash-constrained, and must make a decision about whether to delay paying one of its

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Hand-to-Mouth is currently cash-constrained, and must make a decision about whether to delay paying one of its suppliers, or taking out a loan. They owe the supplier $12,000, but the supplier will give them a 2.4% discount if they pay by today​ (when the discount period​ expires). That​ is, they can either pay $11,712 ​today, or $12,000 in one month when the net invoice is due. Because​Hand-to-Mouth does not have the $11,712 in cash right​ now, it is considering three​ options:
Alternative​ A: Forgo the discount on its trade credit​ agreement, wait and pay the full $12,000 in one month.
Alternative​ B: Borrow the money from Bank​ A, which has offered to lend the firm $11,712 for one month at an APR​ (compounded monthly) of 12.1%. The bank will require a​ (no-interest) compensating balance of 4.8% of the face value of the loan and will charge a $95 loan origination​ fee, which means​ Hand-to-Mouth must borrow even more than the $11,712.
Alternative​ C: Borrow the money from Bank​ B, which has offered to lend the firm $11,712 for one month at an APR of 15.3% ​(compounded monthly). The loan has 1.2% loan origination fee.
Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...
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Cost Management Measuring, Monitoring And Motivating Performance

ISBN: 1601

3rd Canadian Edition

Authors: Leslie G. Eldenburg, Susan K. Wolcott, Liang Hsuan Chen, Gail Cook

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