The Smith Corporation Is a Maker of Fine Stereo Components

question 76

Essay

The Smith Corporation is a maker of fine stereo components and presently has finished goods inventories of $800,000.They need a short-term bank loan of $400,000 for three months.The bank has proposed two different financing arrangements.The first is a floating lien arrangement at a rate of 22 percent.The second proposal is for a terminal warehouse arrangement at 11 percent.Under the latter proposal,Smith will pay $1,000 a month plus round trip shipping expense of $6,000.Which source of credit should be selected by the Smith Corporation? Explain.