Automated Dynamics had sales of $6.5 million last year, and it earned a 4% 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 (i.e., to have 30 days' payables outstanding). The company's balance sheet is as follows (thousands of dollars):
Cash $200 Accounts Payable $900 Accounts receivable 500 Bank loans 1100 Inventory 2000 Accruals 400 Current Assets $2700 Current Liabilities $2400 Land and Buildings 1000 Mortgage on real estate 900 Equipment 1300 Common Stock (0.10 par)500 Retained Earnings 1200 Total Assets $5000 Total Liabilities & Equity $5000
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?
please answer it as soon as possible. Thanks.
