1838 words 8 pages

Comment on the performance of the company.


Why has this profitable company had to borrow so much money from the bank?


What overdraft would Govan expect to have if he continues with “business as usual”? 4.

Should Govan take advantage of the 2½% settlement terms offered by his suppliers? Explain.


As Govan's financial adviser, would you encourage him to go ahead or reconsider his anticipated expansion and his plans for its financing? What should he do?


As his banker would you approve his loan request? If so, would you put any conditions on the loan?


(Optional extra question…) Estimate a selling price for the business.

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The bank's investigator reported: "...Sales are expected to reach R25m in 2012 and may exceed this level if prices of catering supplies were to rise substantially in the near future." On the other hand, it was recognised that the general economic scenario and a return to very tight credit conditions with the resultant shortage of funds might slow down the rate of increase in sales. Govan's sales, however, were protected to some degree from fluctuations because of the relatively high proportion of basic catering supplies provided by the company. Projections beyond 2012 were not easy to make, but the prospects appeared good for a continued growth in the volume of Govan's business over the foreseeable future.
The bank also noted the rapid increase in Govan's accounts and promissory notes payable in the recent past, especially in the start of 2012. The usual terms of purchase in the trade provided for a discount of 2.5% for payments within 10 days of the invoice date. Accounts were due in 30 days at the invoice price but suppliers ordinarily did not object if payments lagged somewhat behind the due date. During the last two years Govan had taken very few purchase discounts because of the

shortage of funds arising from his purchase of Mr Stark's interest in the business and the additional investments in working capital associated with the