Raymond Manufacturing faces a liquidity
crisisit
needs a loan of
$80,000
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
$240,000,
of which
$96,000
is finished goods.
(Note:
Assume a 365-day year.)(1) City-Wide Bank will make a
$80,000
trust receipt loan against the finished goods inventory. The annual interest rate on the loan is
11.5%
on the outstanding loan balance plus a
0.15%
administration fee levied against the
$80,000
initial loan amount. Because it will be liquidated as inventory is sold, the average amount owed
over the month is expected to be
$57,294.
(2) Sun State Bank will lend
$80,000
against a floating lien on the book value of inventory for the 1-month period at an annual interest
rate of
13.4%.
(3) Citizens' Bank and Trust will lend
$80,000
against a warehouse receipt on the finished goods inventory and charge
15.1%
annual interest on the outstanding loan balance. A
0.57%
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
$48,000.
a.Calculate the dollar cost of each of the proposed plans for obtaining an initial loan amount of
$80,000.
b.Which plan do you recommend? Why?
c.If the firm had made a purchase of
$80,000
for which it had been given terms of
2/15
net
31,
would it increase the firm's profitability to give up the discount and not borrow as recommended
in part
b?
Why or why not?
Question content area bottom
Part 1
a.The dollar cost of the trust receipt loan is
$enter your response here.
(Round to the nearest cent.).
Raymond Manufacturing faces a liquiditycrisis�itneeds a loan of.pdf
1. Raymond Manufacturing faces a liquidity
crisisit
needs a loan of
$80,000
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
$240,000,
of which
$96,000
is finished goods.
(Note:
Assume a 365-day year.)(1) City-Wide Bank will make a
$80,000
trust receipt loan against the finished goods inventory. The annual interest rate on the loan is
11.5%
on the outstanding loan balance plus a
0.15%
administration fee levied against the
$80,000
initial loan amount. Because it will be liquidated as inventory is sold, the average amount owed
over the month is expected to be
$57,294.
(2) Sun State Bank will lend
$80,000
against a floating lien on the book value of inventory for the 1-month period at an annual interest
rate of
13.4%.
(3) Citizens' Bank and Trust will lend
$80,000
against a warehouse receipt on the finished goods inventory and charge
15.1%
annual interest on the outstanding loan balance. A
0.57%
warehousing fee will be levied against the average amount borrowed. Because the loan will be
2. liquidated as inventory is sold, the average loan balance is expected to be
$48,000.
a.Calculate the dollar cost of each of the proposed plans for obtaining an initial loan amount of
$80,000.
b.Which plan do you recommend? Why?
c.If the firm had made a purchase of
$80,000
for which it had been given terms of
2/15
net
31,
would it increase the firm's profitability to give up the discount and not borrow as recommended
in part
b?
Why or why not?
Question content area bottom
Part 1
a.The dollar cost of the trust receipt loan is
$enter your response here.
(Round to the nearest cent.)
