1620 Inventory financing Raymond Manufacturing faces a liquidity crisis: It needs a loan of $1,000,000 for one month. Having no source of additional unsecured borrowing, the firm must find a secured source of short-term lending. The firm's accounts receivable are quite low, but its inventory is considered liquid and reasonably good collateral. The book value of Raymond's inventory is $3,000,000, of which $1,200,000 is finished goods. (Note: Assume a 365 -day year.) (1) City-Wide Bank will make a $1,000,000 trust receipt loan against the inventory of finished goods. The annual interest rate on the loan is 14% on the outstanding loan balance plus a 0.35% administration fee levied against the $1,000,000 initial loan amount. Because the loan will be repaid as inventory is sold, the average loan amount owed over the month is expected to be $750,000. (2) Sun State Bank will lend $1,000,000 against a floating lien on the book value of inventory for the 1-month period at an annual interest rate of 15%. (3) Citizens' Bank and Trust will lend $1,000,000 against a warehouse receipt on the finished goods inventory and charge 17% annual interest on the outstanding loan balance. A 0.75% warehousing fee will be levied against the average amount borrowed. Because the loan will be repaid as inventory is sold, the average loan balance is expected to be $600,000. a. Calculate the dollar cost of each of the proposed plans for obtaining an initial loan amount of $1,000,000. b. Which plan do you recommend? Why? c. If the firm had made a purchase of $1,000,000 for which it had been given terms of 3/10 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? 1620 Inventory financing Raymond Manufacturing faces a liquidity crisis: It needs a loan of $1,000,000 for one month. Having no source of additional unsecured borrowing, the firm must find a secured source of short-term lending. The firm's accounts receivable are quite low, but its inventory is considered liquid and reasonably good collateral. The book value of Raymond's inventory is $3,000,000, of which $1,200,000 is finished goods. (Note: Assume a 365 -day year.) (1) City-Wide Bank will make a $1,000,000 trust receipt loan against the inventory of finished goods. The annual interest rate on the loan is 14% on the outstanding loan balance plus a 0.35% administration fee levied against the $1,000,000 initial loan amount. Because the loan will be repaid as inventory is sold, the average loan amount owed over the month is expected to be $750,000. (2) Sun State Bank will lend $1,000,000 against a floating lien on the book value of inventory for the 1-month period at an annual interest rate of 15%. (3) Citizens' Bank and Trust will lend $1,000,000 against a warehouse receipt on the finished goods inventory and charge 17% annual interest on the outstanding loan balance. A 0.75% warehousing fee will be levied against the average amount borrowed. Because the loan will be repaid as inventory is sold, the average loan balance is expected to be $600,000. a. Calculate the dollar cost of each of the proposed plans for obtaining an initial loan amount of $1,000,000. b. Which plan do you recommend? Why? c. If the firm had made a purchase of $1,000,000 for which it had been given terms of 3/10 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