Hand-to-Mouth (H2M) is currently cash-constrained, and must make a F its suppliers, or take out a loan. They owe the supplier $10,000 with terms of 2/10 Net 40, so the supplier will give them a 2% discount if they pay by today (when the discount period expires). Alternatively, they can pay the full $10,000 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 $10,000 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 11.5%. The bank will require a (no-interest) compensating balance of 4.9% of the face value of the loan and will charge a $90 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%. The loan has a 0.7% loan origination fee, which again H2M will need to borrow to cover. Alternative A: The effective annual cost is%. (Round to two decimal places.)
Hand-to-Mouth (H2M) is currently cash-constrained, and must make a F its suppliers, or take out a loan. They owe the supplier $10,000 with terms of 2/10 Net 40, so the supplier will give them a 2% discount if they pay by today (when the discount period expires). Alternatively, they can pay the full $10,000 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 $10,000 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 11.5%. The bank will require a (no-interest) compensating balance of 4.9% of the face value of the loan and will charge a $90 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%. The loan has a 0.7% loan origination fee, which again H2M will need to borrow to cover. Alternative A: The effective annual cost is%. (Round to two decimal places.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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. They owe the supplier $10,000 with terms of 2/10 Net 40, so the supplier will give them
a 2% discount if they pay by today (when the discount period expires). Alternatively, they can pay the full $10,000 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 $10,000 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 11.5%. The bank will require a (no-interest) compensating balance of 4.9% of the face value of the loan and
will charge a $90 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%. The loan has a 0.7% loan origination fee, which again H2M will need to borrow to cover.
Alternative A:
The effective annual cost is%. (Round to two decimal places.)
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