Principles of Managerial Finance

664 PART 5 Short-Term Financial Decisions

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have remitted to Holder as of May 30 and the dates of those remittances.

Assume that the factor’s commission of 2% is deducted as part of determining

the amount of the remittance.

15–18 Inventory financing Raymond Manufacturing faces a liquidity crisis—it needs

a loan of $100,000 for 30 days. Having no source of additional unsecured bor-

rowing, 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.

(1) City-Wide Bank will make a $100,000 trust receiptloan 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 lienon the book value

of inventory for the 30-day period at an annual interest rate of 13%.

(3) Citizens’ Bank and Trust will lend $100,000 against a warehouse receipton

the finished goods inventory and charge 15% annual interest on the out-

standing 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?

Account Amount Date due Status on May 30

A $200,000 May 30 Collected May 15

B 90,000 May 30 Uncollected

C 110,000 May 30 Uncollected

D 85,000 June 15 Collected May 30

E 120,000 May 30 Collected May 27

F 180,000 June 15 Collected May 30

G 90,000 May 15 Uncollected

H 30,000 June 30 Collected May 30