Question
1) Company A is currently cash-constrained, and must make a decision about whether to delay paying one of its suppliers, or taking out a loan.
1) Company A 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 $12,560, but the supplier will give them a 2.64% discount if they pay in the first 18 days (when the discount period expires). That is, they can either take the discount by paying in the first 18 days, or $12,560 in 1 month(s) when the net invoice is due. What would be the cost for the firm if they forgo the discount on its trade credit agreement, wait and pay the full $12,560 in 1 month(s)?
a) Company A 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 $20,172, and they can borrow the money from Bank A, which has offered to lend the firm $20,172 for 1 month(s) at an APR (compounded) of 14%. The bank will require a (no-interest) compensating balance of 7% of the face value of the loan and will charge a $165 loan origination fee, which means Hand-to-Mouth must borrow even more than the $20,172?
b) Company A 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 $19,962, and they can borrow the money from Bank B, which has offered to lend the firm $19,962 for 1 months at an APR of 15% (compounded). The loan has a 1% loan origination fee. What would be the cost for Company A if they decide to borrow from Bank B?
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