11.5 Gainsborough Fashions Ltd operates a chain of fashion shops. In recent months the business has been under pressure from its suppliers to reduce the average credit period taken from three months to one month. As a result, the directors have approached the bank to ask for an increase in the existing overdraft for one year to be able to comply with the suppliers’

demands. The most recent financial statements of the business are as follows:

A dividend of £23 million was paid for the year.
Notes:
1 The loan notes are secured by personal guarantees from the directors.
2 The current overdraft bears an interest rate of 12 per cent a year.
Required:

(a) Identify and discuss the major factors that a bank would take into account before deciding whether to grant an increase in the overdraft of a business.

(b) State whether, in your opinion, the bank should grant the required increase in the overdraft for Gainsborough Fashions Ltd. You should provide reasoned arguments and supporting calculations where necessary

Transcribed Image Text:

Statement of financial position as at 31 May m ASSETS Non-current assets Property, plant and equipment Current assets Inventories at cost Trade receivables Total assets EQUITY AND LIABILITIES Equity 1 ordinary shares General reserve Retained earnings Non-current liabilities Borrowings - loan notes repayable in just over one year's time Current liabilities Trade payables Accrued expenses Borrowings - bank overdraft Taxation Total equity and liabilities 74 198 3 201 275 20 4 17 41 40 162 10 17 5 194 275