Problem: The Raattama Corporation had sales of $3.5 million last year, and it earned a 5 % return after taxes, on sales. Recently the company has fallen behind in accounts payable. Although its terms of purchase are net 30 days, its accounts payable represent 60 days' purchases. The company's treasurer is seeking to increase bank borrowings in order to become current in meeting its trade obligations (that is, to have 30 days' payables outstanding). The company's balance sheet is as follows
(thousands of dollars):
| Cash |
|
$100 |
|
|
Accounts payable |
|
$600 |
| Accounts receivable |
$300 |
|
|
Bank Loans |
|
$700 |
| Inventory |
|
$1,400 |
|
|
Accruals |
|
|
$200 |
| Current assets |
$1,800 |
|
|
Current Liabilities |
|
$1,500 |
|
|
|
|
|
|
|
|
|
| Land and buildings |
$600 |
|
|
Mortgage on real estate |
$700 |
| Equipment |
$600 |
|
|
Common stock, $0.10 par |
$300 |
|
|
|
|
|
Retained earnings |
|
$500 |
| Total assets |
$3,000 |
|
|
Total liabilities and equity |
$3,000 |
Q1. How much bank financing is needeed to eliminate the past-due accounts payable?
Q2. Would you as a bank loan officer make the loan? Why or why not?