Inventory financing Raymond Manufacturing faces a liquidity crisis-it needs a loan of S83,000 for 1 month. Having no source of additional unsecured borrowing, the firm must find a ecured short-term lender. The fim's accounts receivable are quite low, but its inventory is considered liquid and reasonably good collateral. The book value of the inventory is $249,000, of which $99,600 is finished goods. (Note: Assume a 365-day year.)
1. City Mide Bank ill make a $83 000 st ecep t loan against the ished goods ventory The annual interest rate on the loan 1s 1 1.4% on the outstanding loan balance plus a 0.14% administration fee levied against the S83 000 initial loan amount. Because it will be quidated as i ento is sold, the average amount o ed overthe month S pected S62,527
2. Sun State Bank will lend S83.000 against a floating len on the book value of inventory for the 1-monti, period at an annual interest ate of 12.3%
3. Citizens' Bank and Trust wi end $83 000 against a warehouse ece ton he finished goods entory and charge 15.7% annua in es on th outstanding ia balance. A0 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 $49,800. %
a. Calculate the dollar cost of each of the proposed plans for obtaining an initial loan amount of $83,000
b. Which plan do you recommend? Why?
c. If the firm had made a purchase of $83,000 for which it had been given terms of 1/5 net 21, would it increase the firm's profitability to give up the discount and not borrow as recommended in part b? Why or why not?
a. The dollar cost of the trust receipt loan is $ (Round to the nearest cent)