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?
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?
Chapter17: The Management Of Cash And Marketable Securities
Section: Chapter Questions
Problem 10P
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Transcribed Image Text: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?
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