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Alpha corporation needs a $20,000 loan for the next 30 days. It's trying to decide which of the three alternatives to use: A) Forgo the discount on its trade credit agreement that offers terms of 2/10, Net 30. B) Borrow money from bank A, which offered to lend the firm $20,000 for 30 days with 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 Alpha corporation must borrow even more than the $10,000 C) Borrow 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% origination fee. Which of the alternative is the cheapest source of financing for the Alpha corporation.

Alpha corporation needs a $20,000 loan for the next 30 days. It's trying to decide which of the three alternatives to use: A) Forgo the discount on its trade credit agreement that offers terms of 2/10, Net 30. B) Borrow money from bank A, which offered to lend the firm $20,000 for 30 days with 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 Alpha corporation must borrow even more than the $10,000 C) Borrow 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% origination fee. Which of the alternative is the cheapest source of financing for the Alpha corporation.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Alpha corporation needs a $20,000 loan for the next 30 days. It's trying to decide which of the three alternatives to use: A) Forgo the discount on its trade credit agreement that offers terms of 2/10, Net 30. B) Borrow money from bank A, which offered to lend the firm $20,000 for 30 days with 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 Alpha corporation must borrow even more than the $10,000 C) Borrow 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% origination fee. Which of the alternative is the cheapest source of financing for the Alpha corporation.
Transcribed Image Text:Alpha corporation needs a $20,000 loan for the next 30 days. It's trying to decide which of the three alternatives to use: A) Forgo the discount on its trade credit agreement that offers terms of 2/10, Net 30. B) Borrow money from bank A, which offered to lend the firm $20,000 for 30 days with 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 Alpha corporation must borrow even more than the $10,000 C) Borrow 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% origination fee. Which of the alternative is the cheapest source of financing for the Alpha corporation.
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