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

Raymond Manufacturing faces a liquidity crisis: It needs a loan

of \$100,000 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 \$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 1-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. 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 increase the firm’s profitability to give up the discount

and not borrow as recommended in part b? Why or why not?

Share this :

#### Found something interesting ?

##### We don't just promise. Here is what we guarantee!

• On-time delivery guarantee
• PhD-level professional writers
• Free Plagiarism Report

• 100% money-back guarantee
• Absolute Privacy & Confidentiality
• High Quality custom-written papers

## Related Model Questions

Feel free to peruse our college and university model questions. If any our our assignment tasks interests you, click to place your order. Every paper is written by our professional essay writers from scratch to avoid plagiarism. We guarantee highest quality of work besides delivering your paper on time.

Read More »

Read More »

Read More »

## Sales Offer

Coupon Code: SAVE25 to claim 25% special special discount
SAVE