Hand-to-mouth is currently cash-constrained

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Reference no: EM131872585

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 $10,500 with terms of 22/10 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 $10,500 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 $10,500 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 12.1%. The bank will require a (no-interest) compensating balance of 4.6% of the face value of the loan and will charge a $100 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 15.4%. The loan has a 1.2% loan origination fee, which again H2M will need to borrow to cover.

Reference no: EM131872585

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