Reference no: EM131097836
This is my first time posting a problem.. Would be grateful for any assistance
Hand-to-Mouth is currently cash-constrained, and must make a decision about whether to delay paying one of its suppliers, or taking out a loan. They owe the supplier $12,500, but the supplier will give them a 2.4% discount if they pay by today (when the discount period expires). That is, they can either pay $12,200 today or $12,500 in one month when the net invoice is due. Because Hand-to-Mouth does not have the $12,200 in cash right now, it is considering three options:
Alternative A: Forgo the discount on its trade credit agreement, wait and pay the full $12,500 in one month.
Alternative B: Borrow the money from Bank A, which has offered to lend the firm $12,200 for one month at an APR (compounded monthly) of 11.8%. The bank will require a (no-interest) compensating balance of 5.4% 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 $12,200
Alternative C: Borrow the money from Bank B, which has offered to lend the firm $12,200 for one month at an APR of 14.8% (compounded monthly). The loan has a 0.9% loan origination fee.
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