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Short term financing - Selecting an alternative

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The Hand-to-Mouth Company needs a $10,000 loan for the next 30 days. It is trying to decide which if 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 even more than the $10,000.

Alternative C: Borrow the money from Bank B, which has offered to lend the firm $10,000 for 30 days at an APR of 15%. The loan has a 1% loan origination fee.

Which alternative is the cheapest source of financing for Hand-to-Mouth?

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Solution Summary

The solution analysis alternative for short term financing for Hand-to-Mouth Company .

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A - Discount forgone is 2% of 10000 = $200.00

B - Total cost = (12/12 % *10000) + 100 + (5% ...

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