Task 3 A subsidiary of Viago, Lip Smackers Ltd., deals in baked goods. In recent months, the business has been under pressure from its suppliers to reduce the average credit period taken from three months to one month. As a result, the directors approached the Oscar bank to ask for an increase in the existing overdraft for one year, to be able to comply with the suppliers demands. The most recent financial statements of the business are as follows: Statement of Financial Position as of May 31 ASSETS Noncurrent Assets Property, plant, and equipment Current Assets Inventories at cost Trade receivables Total Assets EQUITY AND LIABILITIES Equity $1 ordinary shares $ 74,000 198,000 3,000 201,000 275,000 20,000 General reserve Retained earnings Noncurrent Liabilities Borrowings: Loan notes repayable in just over one years time Current Liabilities Trade payables Accrued expenses Borrowings: Bank overdraft Taxation Total Equity and Liabilities 4,000 17,000 41,000 40,000 162,000 10,000 17,000 5,000 194,000 275,000 Abbreviated Income Statement for the Year Ended May 31 Sales revenue Operating profit Interest charges Profit before taxation Taxation $740,000 38,000 (5000) 33,000 (10,000) Profit for the year A dividend of $23,000 was paid for the year. 23,000 Additional information: o The loan notes are secured by personal guarantees from the directors. o The current overdraft bears an interest rate of 12 percent a year. Answer the following questions for Lip Smackers: o Identify and state the major factors that a bank would take into account before deciding whether to grant an increase in the overdraft of a business. o In your opinion, should the bank grant the required increase in the overdraft for Lip Smackers Ltd.?