How much bank financing is needed to eliminate the past-due

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The Raattama Corporation had sales of $3.5 million last year, and it earned a 5 percent return, after taxes, on sales. Recently, the company has fallen behind in its 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

a. How much bank financing is needed to eliminate the past-due accounts payable?

b. Would you as a bank loan officer make the loan? Why or why not?

Reference no: EM13483414

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