Question: The Shelby Gaming Manufacturing Company has experienced a severe cash squeeze andneeds $200,000 over the next 90 days. The company has already pledged its receivablesin support of a loan. However, it does have $570,000 in unencumbered inventories. Determine the best financing alternative from the following two that are available.
a. The Cody National Bank of Reno will lend against finished goods provided that they are placed in a public warehouse under its control. As the finished goods are released for sale, the loan will be reduced by the proceeds of the sale. The company currently has $300,000 in finished-goods inventory and would expect to replace finished goods that are sold out of the warehouse with new finished goods, so that it could borrow the full $200,000 for 90 days. The interest rate will be 10 percent, and the company will pay quarterly warehousing costs of $3,000. Finally, it will experience a reduction in efficiency as a result of this arrangement. Management estimates that the lower efficiency will reduce quarterly before-tax profits by $4,000.
b. The Vigorish Finance Company will lend the company the money under a floating lien on all of its inventories. The rate will be 23 percent, but no additional expenses will be incurred.