Hand-to-Mouth is currently cash-constrained, and must make a decision about whether to delay paying one of its suppliers, or taking out a loan. They owe the supplier $13,000, but the supplier will give them a 2% discount if they pay by today (when the discount period expires). That is, they can either pay $12,740 today, or $13,000 in one month when the net invoice is due. Because Hand-Mouth does not have the $12,740 today, or $13,000 in one month when the net invoice is due. Because Hand-to-Mouth does not have the $12,740 in cash right now, it 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 from Bank A, which has offered to lend the firm $12,740 for one month at an APR (compounded monthly) of 11.7%. The bank will require a (no-interest) compensating balance of 4.6% of the face value of the loan and will charge a $90 loan origination fee, which means Hand-to-Mouth must borrow even more than the $12,740.
Alternative C: Borrow the money from Bank B, which has offered to lend the firm $12,740 for one month at an APR of 14.9% (compounded monthly). The loan has a 1.1% loan origination fee.
Alternative A: The effective annual cost is ______________________%. (Round to two decemial places)
Alternative B: The effective annual rate is _______________%. (Round to two decimal places)
Alternative C: The effective annual rate is ______________%. (Round to two decimal places)
(Select the best choice below):
A. Alternative B, with the lowest effective annual rate, is the best option for Hand-to-Mouth
B. Alternative C, with the lowest effective annual rate, is the best option for Hand-to-Mouth
C. Alternative A, with the lowest effective annual rate, is the best option for Hand-to-Mouth
D. All the alternatives are equivalent.