ACCTG325

Vega Company produces and sells a complete line of infant and toddlers toys. Its sales. characteristics of the entire toy industry, are very seasonal. The company offers favorable credit to those customers who will place their Christmas orders early and who will accept shipment schedule arranged to fit the production schedules of Vega The customers must place orders by May 15 and be willing to accept shipments beginning August 15 Vega guarantees shipment no later than October 15 Customers willing to accept these conditions are not required for pay for their Christmas purchases until January 30. The suppliers of the ray materials used by Vega-in the manufacture of toys offer more normal credit terms. The unal terms for the raw materials are 2/10,n/30 Vega makes payment within the 10-day discount period during the first 6 months of the year, however, in the remaining 6 months, it does not even meet the 30-day terms. The company regularly pays invoices for raw materials 30 to 90 days after the invoice date during this later period Suppliers have come to accept this pattem because it has existed for many years. In addition, this payment pattern has not affected Vega's credit rating or ability to acquire the necessary raw materials. Vega recently hired a new financial vice president. He feels quite uncomfortable with the unusually large accounts receivable and payables balances in the last 6 months of the year and with the poor payment practice of Vega. He would like to consider alternatives to the present method for financing the accounts receivable. One proposal being considered is to establish a line of credit at a local bank. The company could then draw against this line of credit in order to pay the invoices within the 10-day discount period and pay off the debt in February when the accounts receivable are collected. The effective interest rate for this arrangement would be 12%

Required.

Would long-term financing (debt and common stock) be a sound alternative means of financing Vega's generous accounts receivable terms? Support your answer