Analyze the financial statements of StreetWise Ltd. and answer the questions as indicated below.
Additional information about StreetWise Ltd:
No dividends have been paid to common shareholders for the past three years. Management
needs to determine its investment and financing needs for the next financial year. Sales are predicted to increase by 5% with no additional investment in fixed assets required. All otherexpenses are expected to increase proportionally to sales. In recent months, suppliers have been pressing for payment. The CEO has, therefore, decided to reduce the level of accounts payable to an average of 40 days outstanding. In order to achieve this, he has decided to approach the bank with a view to increasing the overdraft to finance the necessary payments. The business is currently paying 12% interest on the overdraft.
Requirement:
Write a memo to the CEO of StreetWise Ltd. that includes the following:
1. Prepare a financial forecast for the financial year ending January 31, 2016 to determine the company’s investment and financing needs based on the expected growth.
2. Comment on the liquidity and efficiency of the business after calculating relevant ratios.
3. As at January 31, 2105 calculate the amount to be paid to suppliers (accounts payable) to reduce the payment period to an average of 40 days outstanding.
4. State, with reasons, how you consider the bank would react to the proposal to allow the increased overdraft as required by the additional financing required to settle the amount (calculate in 3) to suppliers.
5. Evaluate four source of financing (internal or external, but excluding a bank overdraft) that may be used to finance the reduction in accounts payable and state, with reasons, which of these you consider the most appropriate.