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 $10,000 with terms of 2/10 Net40, so the supplier will give them a 2 % discount if they pay by today(when the discount periodexpires). Alternatively, they can pay the full $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 $10,000 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 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 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 15%. The loan has a 1% loan originationfee, which again H2M will need to borrow to cover.

AlternativeA:

The effective annual cost is _____%. (Round to two decimalplaces.)

AlternativeB:

The effective annual rate is _____%. (Round to two decimalplaces.)

AlternativeC:

The effective annual rate is ______%. (Round to two decimalplaces.)

(Select the best choicebelow.)

A. Alternative A, with the lowest effective annualrate, is the best option forHand-to-Mouth.

B. Alternative B, with the lowest effective annualrate, is the best option forHand-to-Mouth.

C. Alternative C, with the lowest effective annualrate, is the best option forHand-to-Mouth.

D. All the alternatives are equivalent.