a. The Cody National Bank of Reno will lend against finished goods, provided that they are placed in a public warehouse under its control.

As the finished goods are released for sale, the loan is reduced by the proceeds of the sale. The company currently has $300,000 in finished goods inventories and would expect to replace finished goods that are sold out of the warehouse with new finished goods, so that it could borrow the full $200,000 for 90 days. The interest rate is 10 percent, and the company will pay quarterly warehousing costs of

$3,000. Finally, it will experience a reduction in efficiency as a result of this arrangement. Management estimates that the lower efficiency will reduce quarterly before-tax profits by $5,000.