NEW MyLab Finance with Pearson eText -- Access Card -- for Principles of Managerial Finance
14th Edition
ISBN: 9780133543759
Author: Lawrence J. Gitman, Chad J. Zutter
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 16, Problem 16.20P
Inventory financing 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 2110 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?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Inventory financing Raymond Manufacturing faces a liquidity crisis—it needs a loan of $96,000 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 $288,000, of which $115,200 is finished goods.
(Note: Assume a 365-day year.)
(1) City-Wide Bank will make a $96,000 trust receipt loan against the finished goods inventory. The annual interest rate on the loan is 11.6% on the outstanding loan balance plus a 0.23% administration fee levied against the $96,000initial loan amount. Because it will be liquidated as inventory is sold, the average amount owed over the month is expected to be $68,602.
(2) Sun State Bank will lend $96,000against a floating lien on the book value of inventory for the 1-month period at an annual interest rate of 13.5%.
(3) …
Awkward Inc. currently has $2,145,000 in current assets and $858 in current liabilities. The company's managers want to increase the firm inventory, which will be financed by short-term note with the bank. What level of inventories can the firm carry without its current ratio falling below 2.0?
White Inc. wishes to speed up collection of its receivables. White currently offers credit terms of 1/20, net 40. It is considering changing to terms of 2/15 net 30. The collection period is expected to be reduced from 40 to 20 days. The percentage of customers paying within the discount period is expected to increase from 50 percent to 75 percent. Bad debt losses average 6 percent of sales and are not expected to change under the proposed policy. The inventory level is expected to increase by $2,000,000. Annual sales are $30 million. The variable cost ratio is 70 percent. The pretax return on funds made available by this change in policy is 10 percent. Assuming the change in terms is made; determine the net effect on White’s pretax profits.
Chapter 16 Solutions
NEW MyLab Finance with Pearson eText -- Access Card -- for Principles of Managerial Finance
Ch. 16.1 - Prob. 1FOECh. 16.1 - What are the two major sources of spontaneous...Ch. 16.1 - Prob. 16.2RQCh. 16.1 - Prob. 16.3RQCh. 16.2 - Prob. 1FOPCh. 16.2 - How is the prime rate of interest relevant to the...Ch. 16.2 - How does the effective annual rate differ between...Ch. 16.2 - What are the basic terms and characteristics of a...Ch. 16.2 - What is a line of credit? Describe each of the...Ch. 16.2 - What is a revolving credit agreement? How does...
Ch. 16.2 - Prob. 16.9RQCh. 16.2 - Prob. 16.10RQCh. 16.3 - Are secured short-term loans viewed as more risky...Ch. 16.3 - In general, what interest rates and fees are...Ch. 16.3 - Describe and compare the basic features of the...Ch. 16.3 - For the following methods of using inventory as...Ch. 16 - Prob. 1ORCh. 16 - Prob. 16.1STPCh. 16 - Prob. 16.1WUECh. 16 - Prob. 16.2WUECh. 16 - Prob. 16.3WUECh. 16 - Prob. 16.4WUECh. 16 - Horizon Telecom sold 300,000 worth of 120-day...Ch. 16 - Prob. 16.1PCh. 16 - Prob. 16.2PCh. 16 - Prob. 16.3PCh. 16 - Learning Goal 1 P16-4 Early payment discount...Ch. 16 - Prob. 16.5PCh. 16 - Prob. 16.6PCh. 16 - Prob. 16.7PCh. 16 - Prob. 16.8PCh. 16 - Prob. 16.9PCh. 16 - Unsecured sources of short-term loans John Savage...Ch. 16 - Learning Goal 3 P16-11 Effective annual rate A...Ch. 16 - Prob. 16.12PCh. 16 - Compensating balance versus discount loan Weathers...Ch. 16 - Prob. 16.14PCh. 16 - Cost of commercial paper Commercial paper is...Ch. 16 - Prob. 16.16PCh. 16 - Prob. 16.17PCh. 16 - Prob. 16.18PCh. 16 - Prob. 16.19PCh. 16 - Inventory financing Raymond Manufacturing faces a...Ch. 16 - ETHICS PROBLEM Rancco Inc. reported total sales of...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- 6. Identifying the Stakeholders and Alternative Courses of Action Gail Easy, the Controller of Tech-It-Up, just left a meeting with Bob Devious, the CFO of the company. Easy told Devious that because the inventory was slow-moving, it should be written down by $100,000. Devious told Easy not to record her proposed $100,000 write-down of inventory because it would reduce the current ratio below debt covenant requirements on a $1 million loan to Pay-Up-Now Bank & Trust. Moreover, the company anticipates a new public offering of stock next year and Devious wants the earnings to be as high as possible. Question: Identify the stakeholders in this case. Group of answer choices a. suppliers b. creditors c. investors d. all of the abovearrow_forwardSoler Inc. wishes to speed up collection of its receivables. Soler currently offers credit terms of net 30. It is considering changing to terms of 2/10 net 20. The collection period is expected to be reduced from 40 to 25 days. The percentage of customers paying within the discount period is expected to be 60 percent. Bad debt losses average 6 percent of sales and are expected to decrease to 5 percent under the proposed policy. The inventory level is expected to increase by $300,000. Annual billings are $50 million. The variable cost ratio is 75 percent. The pretax return on funds made available by this change in policy is 6 percent. Assuming the change in terms is made; determine the net effect on Soler’s pretax profits.arrow_forwardKareem & Sons last year reported sales of 12 million and an inventory turnover ratio of 4. The company is now adopting a new inventory system. If the new system is able to reduce the firm’s inventory level and increase the firm’s inventory turnover ratio to 8 while maintaining the same level of sales, how much cash will be freed up? Medwing Corporation has a DSO of 19 days. The company averages 5,500 in credit sales each day. What is the company’s average accounts receivable? McDowell Industries sells on terms of 4/10, net 40. Total sales for the year are $825,500. Thirty percent of customers pay on the 15th day and take discounts; the other 70% pay, on average, 60 days after their purchases. What is the days sales outstanding? What is the average amount of receivables? What would happen to average receivables if McDowell toughened its collection policy with the result that all non-discount customers paid on the 40th day? International Industries sells on terms of 3/10, net 50.…arrow_forward
- Vanity Press, Inc., has annual credit sales of $1.9 million and a gross profit margin of 35 percent. Round your answers to the nearest dollar. If the firm wishes to maintain an average collection period of 60 days, what level of accounts receivable should it carry? (Assume a 365-day year.) $ The inventory turnover for this industry averages seven times. If all of Vanity’s sales are on credit, what average level of inventory should the firm maintain to achieve the same inventory turnover figure as the industry? $arrow_forwarda) Kareem & Sons last year reported sales of 12 million and an inventory turnover ratio of 4. The company is now adopting a new inventory system. If the new system is able to reduce the firm’s inventory level and increase the firm’s inventory turnover ratio to 8 while maintaining the same level of sales, how much cash will be freed up?b) Medwing Corporation has a DSO of 19 days. The company averages 5,500 in credit sales each day. What is the company’s average accounts receivable?c) McDowell Industries sells on terms of 4/10, net 40. Total sales for the year are $825,500. Thirty percent of customers pay on the 15th day and take discounts; the other 70% pay, on average, 60 days after their purchases.a. What is the days sales outstanding?b. What is the average amount of receivables?c. What would happen to average receivables if McDowell toughened its collection policy with the result that all non-discount customers paid on the 40th day?d) International Industries sells on terms of…arrow_forwarda) Kareem & Sons last year reported sales of 12 million and an inventory turnover ratio of 4. The company is now adopting a new inventory system. If the new system is able to reduce the firm’s inventory level and increase the firm’s inventory turnover ratio to 8 while maintaining the same level of sales, how much cash will be freed up? b) Medwing Corporation has a DSO of 19 days. The company averages 5,500 in credit sales each day. What is the company’s average accounts receivable? c) McDowell Industries sells on terms of 4/10, net 40. Total sales for the year are $825,500. Thirty percent of customers pay on the 15th day and take discounts; the other 70% pay, on average, 60 days after their purchases.a. What is the days sales outstanding?b. What is the average amount of receivables?c. What would happen to average receivables if McDowell toughened its collection policy with the result that all non-discount customers paid on the 40th day? Solve only B and C sub parts.arrow_forward
- A company has total annual sales (all credit) of $400,000 and a gross profit margin of 20 percent. Its current assets are $80,000; current liabilities, $60,000; inventories, $30,000; and cash, $10,000. a. How much average inventory should be carried if management wants the inventory turnover to be 4? b. How rapidly (in how many days) must accounts receivable be collected if management wants to have an average of $50,000 invested in receivables? (Assume a 360-day year.)arrow_forwardInventory Management a) The Electronics Store begins each week with 60 gadgets in stock. This stock is depleted and reordered weekly. The carrying cost per gadget is $21 per year and the fixed order cost is $45. What is the optimal number of orders that should be placed each year? b) A new customer has placed an order for a turbine engine that has a variable cost of $1.12 million per unit and a credit sales price of $1.64 million. Credit is extended for one period. Based on historical experience, payment for about 1 out of every 178 such orders is never collected. Therequired return is 2.1 percent per period. What is the NPV per unit if this is a one-time order?arrow_forwardMarshall Inc. is looking for ways to shorten its cash conversion cycle. It has annual sales of $36,500,000, or $100,000 a day on a 365-day basis. The firm's cost of goods sold is 75% of sales. On average, the company has $9,000,000 in inventory and $8,000,000 in accounts receivable. Its CFO has proposed new policies that would result in a 20% reduction in inventory conversion period and a 10% in DSO. She also anticipates that the payables deferral period would remain unchanged at 35 days. What will be the company's cash conversion cycle before and after the new policies being implemented? Round to the nearest whole day.arrow_forward
- Negus Enterprises has an inventory conversion period of 50 days, an average collection period of 35 days, and a payables deferral period of 25 days. Assume that cost of goods sold is 80% of sales. What is the length of the firm’s cash conversion cycle? If annual sales are $4,380,000 and all sales are on credit, what is the firm’s investment in accounts receivable? how many times per year does Negus Enterprises turn over its inventory?arrow_forwardInventory Management Williams & Sons last year reported sales of $21 million, cost of goods sold (COGS) of $16 million, and an inventory turnover ratio of 4. The company is now adopting a new inventory system. If the new system is able to reduce the firm's inventory level and increase the firm's inventory turnover ratio to 8 while maintaining the same level of sales and COGS, how much cash will be freed up? Do not round intermediate calculations. Enter your answer in dollars. For example, an answer of $1.23 million should be entered as 1,230,000,000. Round your answer to the nearest dollar.arrow_forwardABC Corporation has average balances of P1,800,000 in inventory, P2,000,000 in accounts receivable, and P120,000 in accounts payables. Its average daily sales are P100,000. Its average daily purchases are P60,000. No changes in inventory and accounts payable levels are expected. REQUIRED: Days inventory outstanding Days receivable outstanding Days payable outstanding Cash Conversion Cycle in daysarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
Financial Accounting: The Impact on Decision Make...
Accounting
ISBN:9781305654174
Author:Gary A. Porter, Curtis L. Norton
Publisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Financial Accounting
Accounting
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
The management of receivables Introduction - ACCA Financial Management (FM); Author: OpenTuition;https://www.youtube.com/watch?v=tLmePnbC3ZQ;License: Standard YouTube License, CC-BY