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 a365-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 whynot?
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Raymond Manufacturing faces a liquidity crisis —it needs a loan of $93,000 for 1 month. Having...
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