A-8.3 Gainsborough Fashions Ltd. operates a small chain of clothing stores in British Columbia. In recent months, the business has been under pressure from its suppliers to reduce the average payment period from three months to one month. As a result, the management of the business has 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 accounts of the business are as follows: Current assets Accounts receivable Inventory Total current assets Gainsborough Fashions Ltd. Balance Sheet as at May 31, 2010 $3,000 198,000 $201,000 Property, plant, and equipment Furniture and fixtures $90,000 Less: Accumulated depreciation 23,000 67,000 Vehicles 34,000 Less: Accumulated depreciation 27,000 7,000 Total property, plant, and equipment 74,000 Total assets $275,000 Current liabilities Bank overdraft) Accounts payable Accrued expenses Taxes payable Total current liabilities Long-term liabilities Bonds payable in 18 months(2) Total liabilities Shareholders' equity Common shares $17,000 162,000 10,000 5,000 $194,000 40,000 $234,000 24,000 17,000 41,000 $275,000 Retained earnings Total shareholders' equity Total liabilities and shareholders' equity Notes 1. The current overdraft bears an interest rate of 12% per year. 2. The bonds are secured by personal guarantees from the members of the board of directors Gainsborough Fashions Ltd. Abbreviated Income Statement for the year ended May 31, 2010 Sales EBIT Interest expense Earnings before taxes Less: Income tax expense Net income Gainsborough Fashions Ltd. $740,000 38,000 5,000 33,000 10,000 $ 23,000 Statement of Retained Earnings for the year ended May 31, 2010 Opening retained earnings, June 1 $ 4,000 Add: Net income 23,000 Less: Dividends paid (10,000) Closing retained earnings, December 31 $17,000 L Required: (a) Identify and discuss the major factors that a bank would take into account before deciding whether or not 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. Provide reasons and supporting calculations.