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Miller Inc. has requested a new line of credit to address the seasonality of revenues. The request is for an $12,500,000 demand loan and resulted in your lender requiring a working capital analysis. You have been assigned the task of calculating the expected line of credit requirement based on the information provided below. The lender has suggested a covenant which limits the current ratio including any demand bank loan to no worse than a 2:1.

Given this is a future oriented analysis - use 360 days as a year.

Your task:

a) Prepare a schedule of working capital that determines what the maximum loan amount is which meets a Current Ratio of 2:1

b) If the maximum loan was not allowed to exceed 75% of Accounts Receivable and 25% of Inventory determined in a) above - is the loan request above covered with adequate security? Show calculation and decision.

c) If the loan limit is below the $12,500,000 requested above, what would the accounts payable days to pay be revised to reach the proposed limit.

Assets
Accounts receivable	45 days to collect
Inventory	120 days on hand (seasonal variation)
Accounts payable	60 days to pay
Short term bank loan	TO BE DETERMINED
Income Statement
Revenue - net 30 day selling terms	120,000,000
Cost of sales	58% of revenues
Key Performance Indicator
Current Ratio	> 2:1

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