Question
Miller Inc. has requested a new line of credit to address the seasonality of revenues. The request is for an $12,500,000 demand loan and resulted
Miller Inc. has requested a new line of credit to address the seasonality of revenues. The request is for an $12,500,000 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 a 2:1. 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 a Current Ratio of 2:1 b) If the maximum loan was not allowed to exceed 75% of Accounts Receivable and 25% of Inventory determined in a) above - is the loan request above covered with adequate security? Show calculation and decision. c) If the loan limit is below the $12,500,000 requested above, what would the accounts payable days to pay be revised to reach the proposed limit.
Assets |
|
Accounts receivable | 45 days to collect |
Inventory | 120 days on hand (seasonal variation) |
Accounts payable | 60 days to pay |
Short term bank loan | TO BE DETERMINED |
| |
Income Statement |
|
Revenue - net 30 day selling terms | 120,000,000 |
Cost of sales | 58% of revenues |
| |
Key Performance Indicator |
|
Current Ratio | > 2:1 |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started