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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
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 $11,500 with terms of 2?/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 $11,500 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 $11,500 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 11.9%. The bank will require a? (no-interest) compensating balance of 4.7% of the face value of the loan and will charge a $105 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 14.9%. The loan has a 1.2% loan origination? fee, which again H2M will need to borrow to cover.
Alternative? A:
The effective annual cost is
27.43
27.43?%. ?(Round to two decimal? places.)
Alternative? B:
The effective annual rate is
nothing
?%. ?(Round to two decimal? places.)
I need help with Alternative B and alternative C.
Expert Solution
| A) | The implied interest rate for 30 days (2%/(1-2%)) | 2.04% | |
| Effective Annual Rate ((1+2%/(1-2%)^12)-1) | 27.43% | ||
| B) | Amount to be borrowed ($11500*(1-2%)) | 11270 | |
| BANK - A | Total Loan Amount ((11270+105)/(1-0.047)) | 11936 | |
| Amount Received (11936-105-11936*4.7%) | 11270 | ||
| Amount Repaid (11936+11936*11.9%/12-11936*4.7%) | 11493 | ||
| Interest rate of 1 month ((11493/11270)-1) | 1.98% | ||
| Effective Annual Rate ((1+(11493-11270)/11270)^12-1) | 26.56% | Answer | |
| C) | Loan Amount (11270/(1-1.2%)) | 11407 | |
| BANK - B | Amount Received | 11270 | |
| Amount repaid (11407+11407*14.9%/12) | 11549 | ||
| Interest Rate for 1 Month ((11549-11270)/11270) | 2.47% | ||
| Effective Annual Rate ((1+(11549-11270)/11270)^12-1) | 34.04% | Answer | |
| Alternative B, with the lowest effective annual? rate, is the best option for?Hand-to-Mouth. |
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