Short term financing with Bank Loans
The Hand-to-Mouth Company needs $10,000 loan for the next 90 days. It is trying to decide which of the three alternatives to use:
Alternative A: Forgo the discount on its trade credit agreement that offers terms of 2/10, net 30.
Alternative B: Borrow the money from Bank A, which has offered to lend the firm $10,000 for 30 days at an APR of 12%. The bank will require a (no-interest) compensating balance of 5% of the face value of the loan and will charge a $100 loan origination fee, which means Hand-to Mouth must borrow more than $10,000.
Alternative C: Borrow the money from Bank B, which has offered to lend the form $10,000 for 30 days at an APR of 15%. The loan has a 1% origination fee.
Which alternative is the cheapest source of financing for Hand-to-Mouth?
Solution Preview
Alternative A : We calculate the cost of foregoing the cash discount. The nominal annual cost of not taking the cash discount is
Nominal annual cost = % discount/(100-% discount) X 365/(Credit period - discount ...
Solution Summary
The solution explains how to determine the cheapest source of financing from the given alternatives
... MINICASE SHORT-TERM FINANCING FOR BREAKFAST. ... ago, Kellogg was considering three short-term borrowing alterna. ... 2. Commercial bank loan with three interest rate ...
... Sources of Short-Term Loans Bank Loans The major ... by banks to businesses is the short-term, self-liquidating ... firms through seasonal peaks in financing needs ...
... exchange fluctuation as we are taking a loan from US Bank. ... fixed cash outflow which can increase the financial risk ... This is a way of raising short-term money or ...
... b) Short- Term Borrowing: Companies can borrow from banks on ... They are replaced when long-term financing is arranged ... Secured bank loans usually require collateral ...
... Commercial bank loans involve a higher level of risk to banks because small businesses ... 4. A money market is considered a short term financing instrument, so ...
... A loan is basically apportioning of financial assets between the lender and ... ii) Overdraft; iii) Secured; iv) Unsecured; v) Long Term and vi) Short Term. ...
... not to pay dividends without permission from the bank. ... the company also borrowed, on a short-term basis, from ... of Andrews' audit of the financial statements of ...
... get the specific loan to meet is short term requirements from banks or financial institutions without ... In this case, the bank or financial institution will ...
... When the note is signed, the bank credits the ... The last type of short-term financing is the commercial paper ... funds, to money market mutual funds, and to banks. ...
