Solid Arity Corporation is a chain of appliance stores in Chicago. It needs to finance all of its inventories, which average the following during the four quarters of the year:
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|
QUARTER |
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|
1 |
2 |
3 |
4 |
|
Inventory level (in thousands) |
$1,600 |
$2,100 |
$1,500 |
$3,200 |
Solid Arity currently utilizes a loan from a finance company secured by a floating lien. The interest rate is the prime rate plus 7.5 percent, but no additional expenses are incurred. The Boundary Illinois National Bank of Chicago is bidding for the Solid Arity business. It has proposed a trust receipt financing arrangement. The interest rate will be 2.5 percent above the prime rate, with servicing costs of $20,000 each quarter. Should the company switch financing arrangements? Why?