If the firm had made a purchase of 100000 for which it had


Raymond Manufacturing faces a liquidity crisis-it needs a loan of $100,000 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 $300,000, of which $120,000 is finished goods. (Note: Assume a 365-day year.)

(1) City-Wide Bank will make a $100,000 trust receipt loan against the finished goods inventory. The annual interest rate on the loan is 12% on the outstanding loan balance plus a 0.25% administration fee levied against the $100,000 initial loan amount. Because it will be liquidated as inventory is sold, the average amount owed over the month is expected to be $75,000.
(2) Sun State Bank will lend $100,000 against a floating lien on the book value of inventory for the 1-month period at an annual interest rate of 13%.
(3) Citizens' Bank and Trust will lend $100,000 against a warehouse receipt on the finished goods inventory and charge 15% annual interest on the outstanding loan balance. A 0.5% 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 $60,000.

a. Calculate the dollar cost of each of the proposed plans for obtaining an initial loan amount of $100,000.
b. Which plan do you recommend? Why?
c. If the firm had made a purchase of $100,000 for which it had been given terms of 2/10 net 30, would it increase the firm's profitability to give up the discount and not borrow as recommended in part b? Why or why not?

 

Request for Solution File

Ask an Expert for Answer!!
Finance Basics: If the firm had made a purchase of 100000 for which it had
Reference No:- TGS0631813

Expected delivery within 24 Hours