Collateral remains in possession of borrower who is

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Unformatted text preview: company—guards the inventory for the lender. Inventory is released only on written approval of the lender. Loan against relatively expensive automotive, consumer durable, and industrial goods that can be identified by serial number. Collateral remains in possession of borrower, who is trusted to remit proceeds to lender upon its sale. A loan against inventory in general. Made when firm has stable inventory of a variety of inexpensive items. Long-Term Financial Decisions 3% to 5% above prime plus a 1% to 3% warehouse fee. Advance 75% to 90% of collateral value. 2% or more above prime. Advance 80% to 100% of cost of collateral. 3% to 5% above prime. Advance less than 50% of collateral value. 1% to 3% discount from face value of factored accounts. Interest of 2% to 4% above prime levied on advances. Interest between 0.2% and 0.5% per month earned on surplus balances left with factor. 2% to 5% above prime plus up to 3% in fees. Advance 50% to 90% of collateral value. Characteristics 658 PART 3 Inventory collateral Factors, commercial banks, and commercial finance companies (1) Pledging Accounts receivable collateral Cost or conditions PART 5 III. Secured sources of short-term loans Source Summary of Key Features of Common Sources of Short-Term Financing (continued) Type of short-term financing TABLE 15.2 658 Short-Term Financial Decisions CHAPTER 15 SELF-TEST PROBLEM LG1 LG2 ST 15–1 Current Liabilities Management 659 (Solution in Appendix B) Cash discount decisions The credit terms for each of three suppliers are shown in the following table. Supplier Credit terms X 1/10 net 55 EOM Y 2/10 net 30 EOM Z 2/20 net 60 EOM a. Determine the approximate cost of giving up the cash discount from each supplier. b. Assuming that the firm needs short-term financing, indicate whether it would be better to give up the cash discount or take the discount and borrow from a bank at 15% annual interest. Evaluate each supplier separately using your findings in part a. c. What impact, if any, would the fact that the firm could stretch its accounts payable (net period only) by 20 days from supplier Z have on your a...
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