Task1. Inventory financing Raymond Manufacturing faces a liquidity crisis—it requires a loan of $100,000 for 1 month. Having no source of additional unsecured borrowing, the firm should find a secured short-term lender. The firm’s accounts receivable are fairly low however its inventory is considered liquid and reasonably good collateral. The book value of inventory is $300,000, of which $120,000 is finished goods. (Note: Suppose a 365-day year.)
(1) City-Wide Bank will make a $100,000 trust receipt loan against finished goods inventory. The annual interest rate on loan is 12% on outstanding loan balance plus a 0.25% administration fee levied against the $100,000 initial loan amount. Since it will be liquidated as inventory is sold, the average amount owed over the month is anticipated to be $75,000.
(2) Sun State Bank will lend $100,000 against a floating lien on book value of inventory for the one 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. Since the loan will be liquidated as inventory is sold, the average loan balance is anticipated to be $60,000.
problem1. Compute the dollar cost of each of the proposed plans for acquiring initial loan amount of $100,000.
problem2. Which plan do you suggest? Why?
problem3. When the firm had made the purchase of $100,000 for which it had been given terms of 2/10 net 30, would it raise the firm’s profitability to give up the discount and not borrow as suggested in part b? Why or why not?