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Princess Inc. has requested a new line of credit to address the seasonality of revenues. The request is for an $9,000,000 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 1.75:1.

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 1.75:1

b) If the maximum loan was not allowed to exceed 50% of Accounts Receivable and 20% of Inventory determined in a) above - is the loan request above covered with adequate security ? Show calculation and decision.

Assets
Cash	Balance = $0 (no overdraft allowed)
Accounts receivable	60 days to collect
Inventory	90 days on hand (seasonal variation)
Accounts payable	45 days to pay
Short term bank loan	TO BE DETERMINED
Income Statement
Revenue - net 30 day selling terms	90,000,000
Cost of sales	55% of revenues
Key Performance Indicator
Current Ratio	> 1.75:1

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