Raattama Corporation: Bank Financing

The Raattama Corporation had sales of $3.5 million last year, and it earned a 5 % return after taxes, on sales. Recently the company has fallen behind in 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 needeed to eliminate the past-due accounts payable?

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

Need calculated in excel. Please see file.

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Solution Summary

The solution calculates bank financing is needeed to eliminate the past-due accounts payable and answers the question: Would you as a bank loan officer make the loan?