Reference no: EM132936530

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.)

Inventory financing ?loan against the finished goods inventory. The annual interest rate on the loan is 12.0?% 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.

?(1) ? City-Wide Bank will make a ?$100,000 trust receipt

?(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 13.0?%.

?(3) ? Citizens' Bank and Trust will lend ?$100,000 against a warehouse receipt on the finished goods inventory and charge 15.0% annual interest on the outstanding loan balance. A 0.50?% 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.

Problem a. Calculate the dollar cost of each of the proposed plans for obtaining an initial loan amount of ?$100,000.

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

Problem 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?