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Problem 27-6 The Hand-to-Mouth Company needs a $10,000 loan for the next 30 days. It is trying to decide which of three alternatives to use:
| Problem 27-6 | |||||||||
| The Hand-to-Mouth Company needs a $10,000 loan for the next 30 days. It is trying to decide which of three alternatives to use: | |||||||||
| Alternative A: | Forgo the discount on its trade credit agreement that offers terms of 2/10, net 30. | ||||||||
| Alternative B: | Borrow the money from Bank A, which has offered to lend the firm $10,000 for 30 days 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, which means Hand-to-Mouth must borrow even more than the $10,000. | ||||||||
| Alternative C: | Borrow the money from Bank B, which has offered to lend the firm $10,000 for 30 days at an APR of 15%. The loan has a 1% loan origination fee. | ||||||||
| Which alternative is the cheapest source of financing for Hand-to-Mouth? | |||||||||
| Principal | $10,000 | ||||||||
| Term of loan | 30 | ||||||||
| Alternative A: Forego trade discount | |||||||||
| Credit Terms | 2.00% | 10 | net | 30 | |||||
| Additional days | |||||||||
| Interest rate per period | |||||||||
| Annual rate | |||||||||
| Alternative B: Borrow from Bank A | |||||||||
| APR | 12.00% | ||||||||
| Compensating balance | 5.00% | ||||||||
| Fee | $100.00 | ||||||||
| Total borrowed | |||||||||
| Interest paid | |||||||||
| Interest & fee paid | |||||||||
| Periodic rate | |||||||||
| Annual rate | |||||||||
| Alternative C: Borrow from Bank B | |||||||||
| APR | 15.00% | ||||||||
| Compensating balance | 0.00% | ||||||||
| Origination fee | 1.00% | ||||||||
| Fee | |||||||||
| Total borrowed | |||||||||
| Interest paid | |||||||||
| Interest & fee paid | |||||||||
| Periodic rate | |||||||||
| Annual rate | |||||||||
| Cheapest loan cost | |||||||||
| This is: | |||||||||
| In cell D16, by using cell references, calculate the additional days of credit (1 pt.). | |||||||||
| In cell D17, by using cell references, calculate the implicit interest rate charged for the additional days of credit (1 pt.). | |||||||||
| In cell D18, by using cell references, calculate the annual cost of payables (1 pt.). | |||||||||
| In cell D25, by using cell references, calculate the total amount to borrow (1 pt.). | |||||||||
| In cell D26, by using cell references, calculate the interest paid (1 pt.). | |||||||||
| In cell D27, by using cell references, calculate the interest & fee paid (1 pt.). | |||||||||
| In cell D28, by using cell references, calculate the periodic rate by dividing the interest & fee paid (1 pt.). | |||||||||
| In cell D29, by using cell references, calculate the annual rate (1 pt.). | |||||||||
| In cell D37, by using cell references, calculate the fee to be paid (1 pt.). | |||||||||
| In cell D38, by using cell references, calculate the total amount to borrow (1 pt.). | |||||||||
| In cell D39, by using cell references, calculate the interest paid (1 pt.). | |||||||||
| In cell D40, by using cell references, calculate the interest & fee paid (1 pt.). | |||||||||
| In cell D41, by using cell references, calculate the periodic rate (1 pt.). | |||||||||
| In cell D42, by using cell references, calculate the annual rate (1 pt.). | |||||||||
| You will find the cheapest loan cost by using the function MIN. In cell D44, by using the function MIN and cell references, find the cheapest loan cost (1 pt.). | |||||||||
| In cell D45, identify the cheapest alternative by typing Alternative A, Alternative B or Alternative C (1 pt.). | |||||||||
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Behavioral Finance And Wealth Management
Authors: Michael M. Pompian
2nd Edition
1118014324, 978-1118014325
