Merino Corp. has requested a new line of credit to address the seasonality of revenues. The request
Question:
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 |
Advertising and Integrated Brand Promotion
ISBN: 978-0538473323
6th edition
Authors: Thomas O'Guinn, Chris Allen, Richard Semenik