Question

​​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 $13,000

with terms of 1.8​/10 Net​ 40, so the supplier will give them a 1.8% discount if they pay by today​ (when the discount period​ expires). ​ Alternatively, they can pay the full $13,000 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 $13,000 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 11.6%. The bank will require a​ (no-interest) compensating balance of 4.5% 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 0.6% loan origination​ fee, which again H2M will need to borrow to cover.

Alternative A

The effective annual cost is ​(Round to two decimal​ places.)

Alternative B

The effective annual rate is ​(Round to two decimal​ places.)

Alternative B

The effective annual rate is ​(Round to two decimal​ places.)

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

WORKING CAPITAL APPROACH - Microsoft Excel (Product Activation Failed) Review View Add-Ins Data - 2x Σ AutoSum : A A = = = V General File Home Insert Page Layout Formulas % Cut Calibri 11 A Ea Copy Paste BI U D- DA Format Painter Clipboard Font FH226 Wrap Text Merge Merge & Center - Center SF $ % % , 4:0 .00 :.: Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Fill Clear Sort & Find & Filter Select Editing Alignment Number Cells EX EY E Z FA FB FC FD FE FE FG FH FL FJ 5 217 218 219 HAND TO MOUTH CASH CONSTRAINED 220 221 TERMS OF CREDIT = EAR = 1.8/10 NET 40 ((1 + (discount/(1-discount)))^(365 / (final date - early date)) )- 1 (1 + (0.018/(1-0.018))^(365/40-10))) - 1 = 24.73% EAR = 222 ALTA 223 224 225 226 ALT B 227 228 229 BANKA loan amount compensating balance origination fee net loan amount interest for a month rate for 30 days = 230 13000 585 [13000 x 4.5%] 90 12325 [13000 - 585-90] 123.95 [=13000*11.6%*30/365 ] 1.7359% (=(11000-594+104.88)/10296 - 1] [= loan amount - compensating balance + interest/net loan amount] 23.29% (1+2.0870%)^(365/30) - 1 231 232 233 234 ► Rea EAR = Z SCORE insu pv fv cash opti LINE OF CREDIT eogmiller CARD BANKER ACCEPTANC FACTOR SI DISC FOCAL Sheet1 Sheet2 ferences WC REQUIRE Sheet30 I BO ...Rag m 0 + 140% * v 40 ENG 03-11-2019

- 2x Fill Z TU Find & Select FD FE FE FG FH FL FJE 236 WORKING CAPITAL APPROACH - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Σ AutoSum : A Calibri 11 A A = = = V Wrap Text General E Copy Paste U D- DA SF BI Merge Merge & Center - Center $ % % , 4:0 .00 :.: Conditional Format Cell Insert Delete Format Sort & Format Painter Formatting as Table Styles 2 Clear Filter Clipboard Font Alignment Number Styles Cells Editing EX234 EX EYEZ FA FB FC 234 235 ALTC BANKB loan amount 13000 origination fee 78 (13000*0.6%) net loan amount 12922 238 interest for a month 160.27 [=13000*15%*30/365 ] rate for 30 days = 1.8439% [ = (13000 + 160.27)/12922 - 1] 240 (= loan amount + interest/net loan amount] 241 EAR = 24.89% (1+1.8439%)^(365/30) - 1 242 243 ANSWER : ALTERNATIVE B, BANK A, WITH THE LOWEST EFFECTIVE ANNUAL RATE 244 245 246 237 239 247 248 249 250 251 ► Rea Z SCORE insu pv fv cash opti LINE OF CREDIT eogmiller CARD BANKER ACCEPTANC FACTOR SI DISC FOCAL WC REQUIRE Sheet1 Sheet2 ferences Sheet30 I |BOJ 140% 0 + 14:22 03-11-2019 DE R * 10 ENG