Reference no: EM131437751

Question: Gainsborough Fashions Ltd operates a small chain of fashion shops in North Wales. 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 have approached the 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:

                                                Balance sheet as at 31 May

Non-current assets Property, plant and equipment
Fixtures and fittings at cost		90.000
Less Accumulated depreciation		23,000	67,000
Motor vehicles at cost		34.000
Less Accumulated depreciation		27,000	7,000
			74.000
Current assets
Inventories at cost		198,000
Trade receivables		3,000
		201,000
Current liabilities
Trade payables	(162,000)
Accrued expenses	(10,000)
Bank overdraft	(17.000)
Taxation	(5,000)
		(194.000)	7,000
			81,000

Non-current liabilities Debentures repayable in just over one
year's time	(40,000)
	41,000
Equity
£1 ordinary shares	20,000
General reserve	4,000
Retained profit	17,000
	41,000

               Abbreviated income statement for the year ended 31 May

Sales revenue	740,000
Net profit before interest and taxation	38,000 (5,
Interest charges
Net profit before taxation	33,000
Taxation	(10,000)
Net profit after taxation	23,000
Dividend paid	(10,000)
Retained profit for the year	13.000

Notes :

1. The debentures are secured by personal guarantees from the directors.

2. The current overdraft bears an interest rate of 12 per cent a year.

Required:

(a) Identify and discuss the major factors that a bank would take into account before deciding whether or not to grant an increase in the overdraft of a business.

(b) State whether, in your opinion, the bank should grant the required increase in the overdraft for Gainsborough Fashions Ltd. You should provide reasoned arguments and supporting calculations where necessary.