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. It owes the supplier $10,000 with terms of (2)/(10) Net 40 , so the supplier will give it a 2% discount if it pays by today (when the discount period expires). Alternatively, it can pay the full $10,000 in one month . when the invoice is due. H 2 M 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 12.4% with monthly compounding. The bank will require a (no-interest) compensating balance of 5.1% 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% with monthly compounding. The loan has a 1.3% loan origination fee, which, again, H 2 M will need to borrow to cover.
Which alternative is the cheapest source of financing for Hand-to-Mouth?
Alternative A:
The effective annual rate is â—» %. (Round to two decimal places.)
