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 Raymond Manufacturing faces a liquidity crisis —it needs a loan of $93,000 for 1 month. Having...

 Raymond Manufacturing faces a liquidity crisis —it needs a loan of $93,000 for 1 month. Having no source of additional unsecured​ borrowing, the firm must find a secured​ short-term lender. The​ firm's accounts receivable are quite​ low, but its inventory is considered liquid and reasonably good collateral. The book value of the inventory is​$279,000​, of which ​$111,600 is finished goods.  (Note​: Assume a​365-day year.)

(1) ​ City-Wide Bank will make a ​$93,000 trust receipt loan against the finished goods inventory. The annual interest rate on the loan is 11.4​% on the outstanding loan balance plus a 0.15​% administration fee levied against the $93,000 initial loan amount. Because it will be liquidated as inventory is​ sold, the average amount owed over the month is expected to be $67,247.

​(2) Sun State Bank will lend ​$93,000 against a floating lien on the book value of inventory for the​ 1-month period at an annual interest rate of 13.1​%.

​(3) ​ Citizens' Bank and Trust will lend ​$93,000 against a warehouse receipt on the finished goods inventory and charge 15.1% annual interest on the outstanding loan balance. A 0.59​% warehousing fee will be levied against the average amount borrowed. Because the loan will be liquidated as inventory is​ sold, the average loan balance is expected to be $55,800.

a.  Calculate the dollar cost of each of the proposed plans for obtaining an initial loan amount of $93,000.

b.  Which plan do you​ recommend? ​ Why?

c.  If the firm had made a purchase of ​$93,000 for which it had been given terms of 1/10 net 29​, would it increase the​ firm's profitability to give up the discount and not borrow as recommended in part b​? Why or why​not?

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Answer #1

9) calculation of dollar cost-of inital loan. amount of $ 93,000 A City Wide Bank, 10.114 113 x 69247) + (0.0058.93000) 1 63.Here is solution of your question. All the best

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