Calculate the dollar cost of each of the proposed plans

Reference no: EM13264882

Inventory financing 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?

Reference no: EM13264882

Questions Cloud

Describe private and hybrid cloud computing models : In the current age of "hyper-connectivity", cloud computing is becoming more widely used and new platforms are emerging on a regular basis. You are required to conduct a review and comparison of public, private and hybrid cloud computing models.

Find the rate at which you lose energy by exhaling humid air : The excess internal energy of metabolism is exhausted through a variety of channels, such as through radiation and evaporation of perspiration. Calculate the rate at which you lose energy by exhaling humid air

At what unit output level would the two methods provide : The sales price per deck would be the same under each method. At what unit output level would the two methods provide the same operating income (EBIT)?

Explain melting point of a mixture of 2-naphthol : An unknown compound has a melting point of 121 - 122 °C. Melting point of a mixture of pure benzoic acid and your unknown sample was 116-122 °C. Melting point of a mixture of 2-naphthol and your unknown sample was 110 - 116 °C. What is your unknow..

Calculate the dollar cost of each of the proposed plans : 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?

Write a function charges that computes the total charge : Write a function 'charges' that computes the total charge for a customer based on the GB of data the user uses per month. The function should also calculate the average cost per MByte of data (rounded to the nearest cent).

Find the average electromagnetic energy density : An 800 kHz radio signal is detected at a point 9.5 km distant from the transmitter tower. Find the average electromagnetic energy density

Define how the ocean optics spectrophotometer works : using any diagrams that you wish to draw, explain how the Ocean Optics spectrophotometer works. Note: we are not asking how to operate the spectrophotometer.

Define what is the mass of the water : A 32.0 iron rod, initially at 22.0C, is submerged into an unknown mass of water at 63.7C, in an insulated container. The final temperature of the mixture upon reaching thermal equilibrium is 59.4C.

User Account

All Pages