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The Hand-to-Mouth company needs a $10,000 loan for the next 30 days. It is trying to...

The Hand-to-Mouth company needs a $10,000 loan for the next 30 days. It is trying to decide which of 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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