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Collateral for Bank

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Mike is the sole shareholder of Cuteness Dog, Inc. ("CDI"). He is operating his company as a sub chapter S corporation. It is a small manufacturing company that produces a complete line of accessories for dogs such as collars, clothing, play toys, treats, etc. Many of the designs are unique and have been patented by CDI. In addition, CDI had its logo registered as a trademark.

CDI sells its product to several large retail chains such as Bullseye and Buymart on 30 day terms. Most of the raw materials for the production of the items come from small suppliers within 200 miles of the CDI plant. CDI buys all of its raw material on open account. The CDI plant is located on a 40 acre tract of property and consists of the main manufacturing building, a separate corporate office building, and a warehouse with loading dock. Mike inherited the real estate from his grandfather, and borrowed money from First National Bank (the "Bank") to build the CDI plant facility. Mike is leasing the factory, office building and warehouse to CDI. The real property has a conservative market value of $10,000,000.00. Mike currently owes the Bank $2,000,000.00. The Bank has the only mortgage on the property. The original debt to the Bank was $8,000,000.00

CDI delivers its own product using its tractor-trailer fleet. The trucks and trailers were purchased from Mad Dog Truck and Trailer Sales, Inc. on an installment sales contract and security agreement. The sales contract and security agreement were sold and assigned to Truck Finance America ("TFA"). TFA's lien is noted on all of the titles for the trucks and trailers. The truck fleet and trailers have a current market value of $4,500,000.00, and CDI owes TFA $1,500,000.00.

CDI wants to expand its market to cover the entire United States. In order to do that, it will need to obtain additional money to develop regional shipping facilities and expand its fleet. CDI goes to the Bank to borrow the money for the expansion.

I. Identify what items of collateral CDI can offer to the Bank. Identify by name or category all secured and unsecured credit or debt that CDI or Mike has now. If necessary, Mike would consider signing a guaranty and pledging collateral as well. What could Mike offer the Bank as collateral? Concentrate only on the questions asked. Do not worry about other factors such as sales, profit, loss, etc.

II. The Bank has agreed to loan the money to CDI for the expansion. Identify each item of collateral that the Bank can take, what steps are necessary for it to have a security interest in the collateral, and how is the security interest perfected. During this process, several of CDI's suppliers have decided that they do not want to sell to CDI on open account. What steps can they take to make sure that they get paid? If you are the bank officer, how would you structure the loan to protect the bank? Concentrate only on the questions asked. Do not worry about other factors such as sales, profit, loss, debt to equity ratio, etc.

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I. Identify what items of collateral CDI can offer to the Bank. Identify by name or category all secured and unsecured credit or debt that CDI or Mike has now. If necessary, Mike would consider signing a guaranty and pledging collateral as well. What could Mike offer the Bank as collateral? Concentrate only on the questions asked. Do not worry about other factors such as sales, profit, loss, etc.

The items that Mike can offer the Bank as collateral are the real estate to the extent of $8,000,000. The value of the real estate is $10,000,000, and Mike owes the Bank $2,000,000, so the bank has a mortgage of $2,000,000 on the real estate, so ($10M - $2M), Mike can offer the Bank real estate as collateral to the extent of $8,000,000. In addition, Mike can offer the Bank trucks and trailers to the extent of $3,000,000. The lien ...

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See Also This Related BrainMass Solution

Corporate Finance
a. Calculate the dollar amount of acceptable accounts receivable collateral held
by Springer Products.
b. The bank reduces collateral by 10% for returns and allowances. What is the
level of acceptable collateral under this condition?
c. The bank will advance 75% against the firms acceptable collateral (after
adjusting for returns and allowances). What amount can Springer borrow
against these accounts?

1) Springer Products wishes to borrow $80,000 from a local bank using its accounts receivable to secure the loan. The banks policy is to accept as collateral any accounts that are normally paid within 30 days of the end of the credit period, as long as the average age of the account is not greater than the customers average payment period. Springers accounts
receivable, their average ages, and the average payment period for each customerare shown in the following table. The company extends terms of net 30 days.

Customer/ Account Rec/ average age of acct/ average pymt period of customer

A $20,000 10 days 40 days
B 6,000 40 35
C 22,000 62 50
D 11,000 68 65
E 2,000 14 30
F 12,000 38 50
G 27,000 55 60
H 19,000 20 35

a. Calculate the dollar amount of acceptable accounts receivable collateral held
by Springer Products.
b. The bank reduces collateral by 10% for returns and allowances. What is the
level of acceptable collateral under this condition?
c. The bank will advance 75% against the firms acceptable collateral (after
adjusting for returns and allowances). What amount can Springer borrow
against these accounts?

2) Raymond Manufacturing faces a liquidity crisisâ?"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
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?

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