Question
Hand-to-Mouth (H2M) is currentlycash-constrained, and must make a decision about whether to delay paying one of itssuppliers, or take out a loan. They owe the
Hand-to-Mouth (H2M) is currentlycash-constrained, and must make a decision about whether to delay paying one of itssuppliers, or take out a loan. They owe the supplier $ 10 comma 000
$10,000 with terms of 2
2/10 Net40, so the supplier will give them a 2 %
2% discount if they pay by today(when the discount periodexpires). Alternatively, they can pay the full $ 10 comma 000
$10,000 in one month when the invoice is due. H2M is considering threeoptions:
AlternativeA: Forgo the discount on its trade creditagreement, wait and pay the full $ 10 comma 000
$10,000 in one month.
AlternativeB: Borrow the money needed to pay its supplier today from BankA, which has offered aone-month loan at an APR of 11.7 %
11.7%. The bank will require a(no-interest) compensating balance of 4.9 %
4.9% of the face value of the loan and will charge a $ 95
$95 loan origination fee. Because H2M has nocash, it will need to borrow the funds to cover these additional amounts as well.
AlternativeC: Borrow the money needed to pay its supplier today from BankB, which has offered aone-month loan at an APR of 14.6 %
14.6%. The loan has a 1.1 %
1.1% loan originationfee, which again H2M will need to borrow to cover.
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