Inventory financing Raymond Manufacturing faces a liquidity

crisisit

needs a loan of

$78,000

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

$234,000,

of which

$93,600

is finished goods.

(Note:

Assume a 365-day year.)(1) City-Wide Bank will make a

$78,000

trust receipt loan against the finished goods inventory. The annual interest rate on the loan is

11.3%

on the outstanding loan balance plus a

0.25%

administration fee levied against the

$78,000

initial loan amount. Because it will be liquidated as inventory is sold, the average amount owed over the month is expected to be

$59,013.

(2) Sun State Bank will lend

$78,000

against a floating lien on the book value of inventory for the 1-month period at an annual interest rate of

12.8%.

(3) Citizens' Bank and Trust will lend

$78,000

against a warehouse receipt on the finished goods inventory and charge

14.7%

annual interest on the outstanding loan balance. A

0.69%

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

$46,800.

a.Calculate the dollar cost of each of the proposed plans for obtaining an initial loan amount of

$78,000.

b.Which plan do you recommend? Why?c.If the firm had made a purchase of

$78,000

for which it had been given terms of

2/15

net

34,

would it increase the firm's profitability to give up the discount and not borrow as recommended in part

b?

Why or why not?