Reference no: EM132490240

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. Citizen's Bank and Trust will lend $149,000 against warehouse receipt on the finished goods inventory and charge 14.(% annual interest on the outstanding loan balance. A 052% 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.

Question a. Calculate the dollar cost of each of the proposed plans for obtaining an initial loan amount of $149,000.

Question b. which plan do you recommend? Why?

Question 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?