Answered step by step
Verified Expert Solution
Question
1 Approved Answer
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. It
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. It owes the supplier $12,500 with terms of 2/10Net40, so the supplier will give it a 2% discount if it pays by today (when the discount period expires). Alternatively, it can pay the full $12,500 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 $12,500 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 11.7% with monthly compounding. The bank will require a (no-interest) compensating balance of 4.6% 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% with monthly compounding. The loan has a 1.3% loan origination fee, which, again, H2M will need to borrow to cover. Which alternative is the cheapest source of financing for Hand-to-Mouth? Alternative A: The effective annual rate is %. (Round to two decimal places.) 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. It owes the supplier $12,500 with terms of 2/10Net40, so the supplier will give it a 2% discount if it pays by today (when the discount period expires). Alternatively, it can pay the full $12,500 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 $12,500 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 11.7% with monthly compounding. The bank will require a (no-interest) compensating balance of 4.6% 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% with monthly compounding. The loan has a 1.3% loan origination fee, which, again, H2M will need to borrow to cover. Which alternative is the cheapest source of financing for Hand-to-Mouth? Alternative A: The effective annual rate is %. (Round to two decimal places.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started