Unformatted text preview: liquidated as
inventory is sold, the average amount owed over the month is expected to
(2) Sun State Bank will lend $100,000 against a floating lien on 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 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? CHAPTER 15 CHAPTER 15 CASE Current Liabilities Management 665 Selecting Kanton Company’s Financing Strategy
and Unsecured Short-Term Borrowing Arrangement M orton Mercado, the CFO of Kanton Company, carefully developed the
estimates of the firm’s total funds requirements for the coming year. These
are shown in the following table. Month Total funds Month Total funds January $1,000,000 July $6,000,000 February 1,000,000 August 5,000,000 March 2,000,000 September 5,000,000 April 3,000,000 October 4,000,000 May 5,000,000 November 2,000,000 June 7,000,000 December 1,000,000 In addition, Morton expects short-term financing costs of about 10% and
long-term financing costs of about 14% during that period. He developed the
three possible financing strategies that follow:
Strategy 1—Aggressive: Finance seasonal needs with short-term funds and
permanent needs with long-term funds.
Strategy 2—Conservative: Finance an amount equal to the peak need with
long-term funds and use short-term funds only in an emergency.
Strategy 3—Tradeoff: Finance $3,000,000 with...
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