Question
Imelda Corporation has been manufacturing oil exploration spares for a number of successful years. However, competition is becoming fierce and technological development requires an equipment
Imelda Corporation has been manufacturing oil exploration spares for a number of successful years. However, competition is becoming fierce and technological development requires an equipment modernization effort that requires $200,000 in new funding.
Several options are being considered to increase the funds available for such financing:
1. Provide a 1.5% discount if customers pay within 10 days and 2% within 5 days. The current terms are "net 40 days". It was stated that under the first policy 80% of customers would benefit while only 60% would benefit under the second policy.
2. Waive the vendor discount to defer payment up to the allowable limit.
3. Attempt to obtain a bank loan with an interest rate of 24%, knowing that the balance due is 20%.
It is useful to know that sales and purchases for the last fiscal year amounted to $3,000,000 and $1,800,000 respectively. Purchases and sales are evenly distributed throughout the year. Suppliers grant:
- The terms "3/10, net 30" for the 34 of the purchases.
- The terms "net 30" for the remaining quarter.
Balance sheet as of December 31, 2002
Bank 10 000$ | Accounts Payable 150 000$ |
Accounts Receivable 290 000$ | Bank loan 50 000$ |
Inventory 300 000$ | Various 50 000$ |
Short-term assets 600 000$ | 250 000$ |
Long-term loan 300 000$
The company's income tax rate is 50%. We consider 360 days per year.
- Explain what other financing structure would have been more favorable to a sustainable balance of the company's financial situation, particularly in terms of liquidity.
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