Merino Corp. has requested a new line of credit to address the seasonality of revenues. The request is for an $6,250,000 demand loan and resulted in your lender requiring a working capital analysis. You have been assigned the task of calculating the expected line of credit requirement based on the information provided below. The lender has suggested a covenant which limits the current ratio including any demand bank loan to no worse than 1.75:1.

Given this is a future oriented analysis - use 360 days as a year.

Your task:

a) Prepare a schedule of working capital that determines what the maximum loan amount is which meets the proposed Current Ratio of 1.75:1 - can the request be met? (15 marks)

b) If the maximum loan was not allowed to exceed 50% of Accounts Receivable and 5% of Inventory determined in a) above - is the loan request above covered with adequate security? Show calculation and decision. (5 marks)

Assets
Cash	Balance = $0 (no overdraft allowed)
Accounts receivable	45 days to collect - EFT strategy
Inventory	4.8 times turnover (seasonal variation)
Accounts payable	45 days to pay
Short term bank loan	TO BE DETERMINED
Income Statement
Revenue - net 30 day selling terms	95,000,000
Cost of sales	65% of revenues
Key Performance Covenant proposed
Current Ratio	> 1.75:1