EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 3, Problem 16P
Summary Introduction
To determine: The additional amount that could be borrowed by Company H to finance its accounts receivables and inventories.
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Sun Manufacturing Company is negotiating a loan with AUS Bank, in order to purchase raw material. Sun can offer only its current inventory and account receivables as collateral. The bank loan officer advises Sun that based on current market values of offered types of collateral you are likely to receive a loan ranging between $1.5 million and $3.5 million. Under the guideline for collateral, estimate the current market value of inventory and the current market value of account receivables of Sun Company.
Crane Inc. (CI) has a short-term working capital loan to help finance its working capital. The terms of the loan enable CI to borrow an
amount of up to 35% of its inventory balance and 55% of its accounts receivable. One of the loan covenants requires that CI maintain
a current ratio greater than 2. Information related to CI's current assets and current liabilities is shown in the following table:
In thousands
Cash
Accounts receivable
Inventory
Other current assets,
Accounts payable
Short-term bank loan
Other current liabilities
(a)
Current ratio
2024
CI
$161
2,054
1,342
338
1.402
562
56
2023
$224
1,230
2,306
395
1.343
Does CI satisfy the loan covenant in both years? (Round answers to 2 decimal places, eg. 18.45)
278
112
2024
times
the loan covenant in 2024
the loan covenant in 2023
2023
times
Airport Accessories (AA) has several loans outstanding with a local bank. The loan contract contains an agreement that AA must maintain a current ratio of at least 0.90. Micah, the assistant controller, estimates that the year-end current assets and current liabilities will be $2,100,000 and $2,400,000, respectively. These estimates provide a current ratio of only 0.875.
Violation of the debt agreement will increase AA’s borrowing costs because the loans will be renegotiated at higher interest rates.Micah proposes that AA purchase inventory of $600,000 on credit before year-end. This will cause both current assets and current liabilities to increase by the same amount, but the current ratio will increase to 0.90. The extra $600,000 in inventory will be used over the next year. However, the purchase will cause warehousing costs and financing costs to increase.
Micah is concerned about the ethics of his proposal. What do you think?
Chapter 3 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Ch. 3 - Prob. 1QTDCh. 3 - Prob. 2QTDCh. 3 - Prob. 3QTDCh. 3 - Prob. 4QTDCh. 3 - Prob. 5QTDCh. 3 - Prob. 6QTDCh. 3 - Prob. 7QTDCh. 3 - Prob. 8QTDCh. 3 - Prob. 9QTDCh. 3 - Prob. 10QTD
Ch. 3 - Prob. 11QTDCh. 3 - Prob. 12QTDCh. 3 - Prob. 13QTDCh. 3 - Prob. 14QTDCh. 3 - Prob. 1PCh. 3 - Prob. 2PCh. 3 - Prob. 3PCh. 3 - Prob. 4PCh. 3 - Prob. 5PCh. 3 - Prob. 6PCh. 3 - Prob. 7PCh. 3 - Prob. 8PCh. 3 - Prob. 9PCh. 3 - Prob. 10PCh. 3 - Prob. 11PCh. 3 - Prob. 12PCh. 3 - Prob. 13PCh. 3 - Prob. 14PCh. 3 - Prob. 15PCh. 3 - Prob. 16PCh. 3 - Prob. 17PCh. 3 - Prob. 18PCh. 3 - Prob. 19PCh. 3 - Prob. 20PCh. 3 - Prob. 21P
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