Question

Inventory financing - Raymond Manufacturing faces a liquidity crisis - it needs a loan of $149,000 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 $447,000 of which $178,800 is finished goods (Note: assume a 365-day year)

1.City-wide Bank will make a $149,000 trust receipt loan against the finished goods inventory. The annual interest rate on the loan is 11.8% on the outstanding loan balance plus a 0.13% administration fee levied against the $149,000 initial loan amount. Because it will be liquidated as inventory is sold, the average amount owed over the month is expected $105,304.

2. Sun State Bank will lend $149,000 against a floating lien on the book value of inventory for the 1-month period at an annual interest rate of 12.7%.

3. Citizens Bank and Trust will lend $149,000 against warehouse receipt on the finished goods inventory and charge 14.9% annual interest on the outstanding loan balance. A 0.52% 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 $89,400.

a. calculate the dollar cost of each of the proposed plans for obtaining and initial loan amount of $149,000.

b. which plan do you recommend? Why?

c. if the firm had made a purchase of $149,000 for which it had been given terms of 2/5 net 20, would it increase the firm's profitability to give up the discount and not borrow as recommended in part b? Why or why not?

Answer 1

loang- - ay calculating the dollar cost of each proposed ☺ Dollar cost of torust receipt loan = (Aug monthly toan balance x interest rate per month) + ( Initial loan amount * . administrative fees) = (105,304 x (18.10.2)) + [1, 49,000 * 0:131] = 1035.489 + 193.7 = $ 1,229.189 lis Sun State bank :- = {[12:4-6)12) x 149,000) + [ox 1,49,0003 = $ 1576.916 riig citizens bank - [89,400 x (14.90) 112)] + [89 400 x0:527 = 1,110.05 +464.88 =$1574.93 (b) I recommend city wide bank Low cost compared to others. as it has

c) cost of giving up cash discount = CD x 365 c (100% -CD) Ñ = 2 * 365 20 (100-2) 19 te Affili 39.210 logo effect Interest on loan - Lanterest / amount Recieved] X12 X _$1229-189 x12 105,304 ha = 0.1400 = 1400 . The cost of giving up discount is higher boudlowing at city wide bank, the form borrow to take the discount. than should