Paiges Bed and Breakfast provides lodging and hospitality services. From its inception until 2 years ago, the
Question:
Paige’s Bed and Breakfast provides lodging and hospitality services. From its inception until 2 years ago, the company had a steady record of growth in sales, assets, and profits. During the second half of 2006 the company experienced a drop in demand for its services. 2007 continued to be a poor year and, despite intense marketing efforts that included high discounts and extended credit, sales barely increased. Inventories ballooned and the company’s payments to suppliers slowed considerably.
However, in January 2008, Paige and her finance manager were reviewing the prospects for 2008. Paige anticipated a surge in demand for lodging services in the coming years. She felt that her facilities needed to be expanded in order to meet future demand. She anticipated that if steps were initiated immediately, the expansion program could be completed by the middle of 2008. By then, the company’s bulging inventories could be brought down. In order to finance the expansion, she proposed to obtain a $1 million loan from the company’s bank. She instructed her finance manager to prepare a forecast for 2008 EXCLUDING the expansion plan. The projections for 2008 in the data below already assume the following:
- Increase in sales and cost of goods sold 10%
- Selling and administrative expenses 11% of sales
- Average collection period 45 days
- Inventory (days sales) 72 days
- Accounts payable 75% of the 2007
Complete the REQUIRED items listed below. Assume you are the loan officer for the company’s bank. Would you approve the loan? If yes, what conditions would you attach to the loan?