Hello please just this question one

LAVELY CLOTHING COMPANY After rapid business growth in recent years, the Lavely Clothing Company in January 2007 anticipated further substantial increases in sales. Despite good profits, the company debt from the Benchmark Community Bank to $520,000 in January 2007 . Lately, Tom Hicks, the founder and chief executive officer of the company, has been somewhat concerned about his firm s ability to raise the required amount of capital to finance future growth in sales. While Mr. Hicks has been treated as a preferred customer of the Benchmark Community Bank, Debra Brandon, vice president and loan officer at the bank, showed some signs of considerable displeasure at their recent meeting. The Lavely Clothing Company, located in Richmond, is a manufacturer of sportswear and swimsuits for men, women, and juniors. The company was incorporated in 1987, but until 2004Mr. Hicks purposely restricted his sales to the Richmond area. During the last few years, however, he did notice a decided increase in his sales volume. From 2004 on, the company's sales grew rapidly and Mr. Hicks found it hard to expand the company fast enough to keep up with demand. The company has now about 720 customers (depart-ment stores and specialty shops) throughout the southeastern United States. Reginald Dunnavant, the newly appointed vice president of finance, has been pondering the short-term financial problems of the company. Before Mr. Dunnavant took the job, he knew that his predecessor had been fired for inept working capital management. In order to better understand this alleged ineptness, he decided to analyze the financial data listed in Exhibits 1 and 2. Mr. Dunnavant has noted that the company's net sales and earnings after taxes have increased rapidly since 2004. This growth has been accompanied by comparable increases in assets and liabilities. He found that, while earnings rates have continued to improve, they were below industry standards for returns on investment and net sales. Furthermore, he observed that the company's return on owners' equity has been higher than the industry norm in 2007 simply because its debt ratio has increased steadily and has been consistently higher than the industry average. Mr. Dunnavant was stunned by a number of additional findings. First, the current ratio has dropped considerably to well below the industry average. Second, bad debt losses have expanded to four or five times the industry average. Third, the average collection Period has been more than twice the industry standard. Fourth, while the dividend as approximately twings after taxes has declined somewhat during recent years, it has been rom. Fifth, the company received a 402 Part 3: CASE STUDIES notice from the Benchmark Community Bank which stated that the loan would be declared due and immediately payable unless the current ratio of 1.76 was not improved to meet the industry average of 2.00 within two months. The bank's notice indicated that Dunnavant's predecessor had received a less severe notice one year earlier. Finally, the Exhibit 1 Lavely Clothing Company Balance Sheets as of December 31, 2004 to 2007 in thnusands of dollars) and 10 percent finished goods. 2 The long-term bank loan at an interest cost equal to the prime rate, plus 1 percent (2004-2005); 1.5 percent (2006); and 3 percent (2007). 3 Insiders control about 40 percent of common stock. Mr. Dunnavant has been informed by Mr. Hicks that the company will continue is plan for future sales growth and that it will not reduce its dividend payout ratio below N percent. Of course, he knows exactly what Mr. Hicks has asked him to do: (1) quidely meet the bank's mandate of increasing the current ratio, (2) simultaneously lower the average collection period and the debt ratio, and (3) drastically reduce the amount d bad debt losses. As Mr. Dunnavant suspects that stockholders would not approve new preferred or mon stock issues at this time, he has proposed three alternatives for the consider to to and bad debt losses. Case Study 5: Secured Short-Term Financing 403 Lavely Clothing's directors. The first alternative calls for a reduction in current liabilities through increases in the outstanding long-term bank loan, the latter possibly secured by inventory. The second alternative calls for the pledging of accounts receivable with a major finance company at an interest cost equal to the prime rate, plus a 3 percent premium. in would be responsible for any bad debt lossently 12 percent. In addition, tor the factoring of accounts receivable at a commission resters the third alternative calls and an interest cost equal to the prime rate, plus a 2.5 percent 2 percent of net sales before the receivables' average due date. Exhibit 2 Lavely Clothing Company Other Financial Data as of December 31. 2nna in nnner nulsales on credit whose terms are equal to the industry average. All sales on credit whose terms are equal to the industry average. 'The operating costs of the company's credit department are 2 percent of net sales. QUESTIONS 1. What is the effective interest cost of the second alternative (pledging of accounts receivable) to the company? LAVELY CLOTHING COMPANY After rapid business growth in recent years, the Lavely Clothing Company in January 2007 anticipated further substantial increases in sales. Despite good profits, the company debt from the Benchmark Community Bank to $520,000 in January 2007 . Lately, Tom Hicks, the founder and chief executive officer of the company, has been somewhat concerned about his firm s ability to raise the required amount of capital to finance future growth in sales. While Mr. Hicks has been treated as a preferred customer of the Benchmark Community Bank, Debra Brandon, vice president and loan officer at the bank, showed some signs of considerable displeasure at their recent meeting. The Lavely Clothing Company, located in Richmond, is a manufacturer of sportswear and swimsuits for men, women, and juniors. The company was incorporated in 1987, but until 2004Mr. Hicks purposely restricted his sales to the Richmond area. During the last few years, however, he did notice a decided increase in his sales volume. From 2004 on, the company's sales grew rapidly and Mr. Hicks found it hard to expand the company fast enough to keep up with demand. The company has now about 720 customers (depart-ment stores and specialty shops) throughout the southeastern United States. Reginald Dunnavant, the newly appointed vice president of finance, has been pondering the short-term financial problems of the company. Before Mr. Dunnavant took the job, he knew that his predecessor had been fired for inept working capital management. In order to better understand this alleged ineptness, he decided to analyze the financial data listed in Exhibits 1 and 2. Mr. Dunnavant has noted that the company's net sales and earnings after taxes have increased rapidly since 2004. This growth has been accompanied by comparable increases in assets and liabilities. He found that, while earnings rates have continued to improve, they were below industry standards for returns on investment and net sales. Furthermore, he observed that the company's return on owners' equity has been higher than the industry norm in 2007 simply because its debt ratio has increased steadily and has been consistently higher than the industry average. Mr. Dunnavant was stunned by a number of additional findings. First, the current ratio has dropped considerably to well below the industry average. Second, bad debt losses have expanded to four or five times the industry average. Third, the average collection Period has been more than twice the industry standard. Fourth, while the dividend as approximately twings after taxes has declined somewhat during recent years, it has been rom. Fifth, the company received a 402 Part 3: CASE STUDIES notice from the Benchmark Community Bank which stated that the loan would be declared due and immediately payable unless the current ratio of 1.76 was not improved to meet the industry average of 2.00 within two months. The bank's notice indicated that Dunnavant's predecessor had received a less severe notice one year earlier. Finally, the Exhibit 1 Lavely Clothing Company Balance Sheets as of December 31, 2004 to 2007 in thnusands of dollars) and 10 percent finished goods. 2 The long-term bank loan at an interest cost equal to the prime rate, plus 1 percent (2004-2005); 1.5 percent (2006); and 3 percent (2007). 3 Insiders control about 40 percent of common stock. Mr. Dunnavant has been informed by Mr. Hicks that the company will continue is plan for future sales growth and that it will not reduce its dividend payout ratio below N percent. Of course, he knows exactly what Mr. Hicks has asked him to do: (1) quidely meet the bank's mandate of increasing the current ratio, (2) simultaneously lower the average collection period and the debt ratio, and (3) drastically reduce the amount d bad debt losses. As Mr. Dunnavant suspects that stockholders would not approve new preferred or mon stock issues at this time, he has proposed three alternatives for the consider to to and bad debt losses. Case Study 5: Secured Short-Term Financing 403 Lavely Clothing's directors. The first alternative calls for a reduction in current liabilities through increases in the outstanding long-term bank loan, the latter possibly secured by inventory. The second alternative calls for the pledging of accounts receivable with a major finance company at an interest cost equal to the prime rate, plus a 3 percent premium. in would be responsible for any bad debt lossently 12 percent. In addition, tor the factoring of accounts receivable at a commission resters the third alternative calls and an interest cost equal to the prime rate, plus a 2.5 percent 2 percent of net sales before the receivables' average due date. Exhibit 2 Lavely Clothing Company Other Financial Data as of December 31. 2nna in nnner nulsales on credit whose terms are equal to the industry average. All sales on credit whose terms are equal to the industry average. 'The operating costs of the company's credit department are 2 percent of net sales. QUESTIONS 1. What is the effective interest cost of the second alternative (pledging of accounts receivable) to the company