A company is negotiating with the bank for a $200,000/ 90 day/12% loan effective July 1 of the current year. If the bankgrants the loan, the proceeds will be $194,000 which the companyintends to use on July 1 as follows: pay accounts payable$150,000; purchase equipment $160,000; add to bank balance$28,000.
the current working capital position, according to financialstatements as of June 30 as follows:
cash inbank.......................................................................$20,000
receivables(net of allowance for doubtfullaccounts............ 160,000
merchandiseinvnetory....................................................... 90,000
total currentassets............................................................$270,000
accounts payable(includes accrued operatingexpense)...... 150,000
workingcapital.................................................................$120,000
These estimates have been made, which are to be used in a 3month cash budget:
sales(all accounts) for July $300,000, August $360,000 Sept$270,000 Oct $200,000
Past experience shows that 80% of the receivables, in anymonth will be collected in the month following the sale. 19%will be collected in the second month following the sale and the 1%will prove uncollectible. They expect to collect $120,00 ofthe June30 receivables in July and the remaining $40,000 inAugust.
Cost of goods sold has averaged about 65% of sales. Operating expenses are budgeted at $36,000 per month plus 8% ofsales. With the exception of $4,400 per monthdepreciation expense, all operating expenses and purchases are inaccount and paid in the month following their occurance.
On the basis of the cash forecast, write a brief report explaining whether the compnay will be able to repay the $200,000 bank loan at the end of September.