P16-20- Inventory financing Raymond Manufacturing faces a liquidity crises; It needs a lone of $100,000 for a month. Having no source of additional unsecured borrowing, the firm must find a secured short term lender. The firms accounts receivable are quiet low, but it inventory is considered liquid and reasonable good collateral. The book value of the income is $300,000, of which $120,000 is finished goods. (Note; assume a 365-day year)

1) City Wide Bank will make a $100,000 trust receipt loan against the finished goods inventory. The annual interest rate on the loan is 12% 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.

2) Sun State Bank will lend $100,000 against a floating lien on the book value of inventory for the one month period at an annual interest rate of 13%.

3) Citizen Bank and Trust will lend $100,000 against a warehouse receipt on the finished goods and charge 15% annual interest on the outstanding loan balance. A 0.5% 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.

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

b) Which plan do you recommend? Why?

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 interest the firms profitability to give up the discount and not borrow as recommended in part b? Why or why not?