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 $12,500 with terms of 2.2?/10Net 40, so the supplier will give them a 2.2% discount if they pay by today (when the discount period? expires). Alternatively, they can pay the full $12,500 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 $12,500in 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 4.7% of the face value of the loan and will charge a $95 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 0.5% 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)
Alternate C: The effective annual rate ______% (Round to two decimal places)
(Select the best choice below.)
A. Alternative C, with the lowest effective annual rate, is the best option for Hand-to-Mouth.
B. Alternative A, with the lowest effective annual rate, is the best option for Hand-to-Mouth.
C. Alternative B, with the lowest effective annual rate, is the best option for Hand-to-Mouth.
D. All the alternatives are equivalent.