Question
Calibri Bold 12 B I U Y A 09 2)Fad Corporation had a temporary cash squeeze near its balance sheet date. It needed cash
Calibri Bold 12 B I U Y A 09 2)Fad Corporation had a temporary cash squeeze near its balance sheet date. It needed cash badly to cover a seasonal dip in sales. However, if any additional money were borrowed, the company would violate a loan covenant requiring that a defined debt/equity ratio be maintained. To get around this requirement, the top two officers Fad Corporation set up another corporation called Sink, Inc. Fad made a large sale of inventory to Sink at cost. Sink used the inventory as collateral for a three-month loan from a local bank. The money from the loan was used to pay Fad for the inventory transaction. At the end of the three-month period, Fad intended to repurchase the inventory from Sink at a price that would allow Sink repay the loan plus interest. Required: (25 marks) Apply the WIR model in detail!
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