Question

Inventory financing   Raymond Manufacturing faces a liquidity crisis - it needs a loan of ​$108,000 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 ​$324,000​, of which ​$129,600 is finished goods.  ​(Note​: Assume a​ 365-day year.)

​(1) ​ City-Wide Bank will make a ​$108,000 trust receipt loan against the finished goods inventory. The annual interest rate on the loan is 11.9​% on the outstanding loan balance plus a 0.21​% administration fee levied against the $108,000 initial loan amount. Because it will be liquidated as inventory is​ sold, the average amount owed over the month is expected to be $ 81,967.

​(2) Sun State Bank will lend ​$108,000 against a floating lien on the book value of inventory for the​ 1-month period at an annual interest rate of 12.9​%. ​

(3) ​ Citizens' Bank and Trust will lend ​$108,000 against a warehouse receipt on the finished goods inventory and charge 15.5 % annual interest on the outstanding loan balance. A 0.66​% 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 $64,800.

a.  Calculate the dollar cost of each of the proposed plans for obtaining an initial loan amount of ​$108,000.

b.  Which plan do you​ recommend? ​ Why?

c.  If the firm had made a purchase of ​$108,000 for which it had been given terms of 2​/10 net 25​, would it increase the​ firm's profitability to give up the discount and not borrow as recommended in part b​? Why or why​ not?

a.  The dollar cost of the trust receipt loan is ​$_____ ​ (Round to the nearest​ cent.)

PLEASE ANSWER ALL PARTS!

Answer 1