Question

Inventory financing   Raymond Manufacturing faces a liquidity crisislong dashit needs a loan of ​$125 comma 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 ​$375 comma 000​, of which ​$150 comma 000 is finished goods.  ​(Note​: Assume a​ 365-day year.) ​(1) ​ City-Wide Bank will make a ​$125 comma 000 trust receipt loan against the finished goods inventory. The annual interest rate on the loan is 11.6​% on the outstanding loan balance plus a 0.23​% administration fee levied against the $ 125 comma 000 initial loan amount. Because it will be liquidated as inventory is​ sold, the average amount owed over the month is expected to be $ 87 comma 750. ​(2) Sun State Bank will lend ​$125 comma 000 against a floating lien on the book value of inventory for the​ 1-month period at an annual interest rate of 12.3​%. ​(3) ​ Citizens' Bank and Trust will lend ​$125 comma 000 against a warehouse receipt on the finished goods inventory and charge 15.3 % annual interest on the outstanding loan balance. A 0.53​% 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 $ 75 comma 000. a.  Calculate the dollar cost of each of the proposed plans for obtaining an initial loan amount of ​$125 comma 000. b.  Which plan do you​ recommend? ​ Why? c.  If the firm had made a purchase of ​$125 comma 000 for which it had been given terms of 2​/5 net 21​, 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