Question

Only need to approve loan or not

LOAN DETAILS

Little Annin Flagmakers has requested a line of credit of US$60,000 to cover production costs during the seasonal increase in business. Kent Bank uses the following terms on its lines of credit. All borrowing is done at the beginning of the month, in whole dollar increments. All repayments are made at the end of the month, in whole dollar increments. The full line of credit is expected to be paid off by the end of the quarter with all of the interest repaid at the end of the quarter. The interest rate on this loan is 16 percent per year.

Little Annio Flagmakers Cash Budget (USD) April May June Quarter Cash Balance, Beginning: $37,745 $76,964 $35,372 $179,784 Add: Receipts Cash Collections $252,000 $453,000 $540,000 $504,628 $1,245,000 $1,065,216 Total Cash Available $289,745 $529,964 Less Disbursements: Direct Materials $451,270 $92,884 $51,800 $173,642 $134,000 Direct Labor $233.800 Manufacturing Overhead $90.900 56,125 15,000 $111,450 60,500 Selling and Administrative $184,744 $48.000 $89,950 56,750 15,000 154,600 $394,444 $292,300 173,375 Dividends 15,000 45,000 Equipment Purchases 47,820 202,420 Total Disbursements $306,709 $494,592 $1,195,745

Answer 1

The loan cannot be approved.

The reason is that there is deficiency of cash available throughout the quarter [during all the three months] because of which the there is no chance payment of the interest on the loan and payment of principal during the quarter.

The loan can be sanctioned only if the following conditions are agreed to by the firm.

*Not paying dividends.

*Reducing capital expenditure during the period to such an extent it permits repaying the loan and the interest for 3 months.