Corporate Finance

Outdoor Thrills, Inc. Ms. Fara Zhang had just delivered unwelcome news to Mr. Keith Drennan, president and owner of Outdoor Thrills, Inc. (OTI). Ms. Zhang, the firm’s accountant reported that the firm’s cash balance had fallen to approximately $1,250.1 Ms. Zhang, a local Certified Public Accountant (CPA), went on to explain that her estimate for the coming 60 days showed that the collection of accounts receivable during this period would be insufficient to pay certain trade obligations on which speedy payment was essential. These projections, in fact, showed that the company’s planned level of purchases and sales to June 1 would result in substantially greater accounts payable on that date than at present. OTI has been criticized by trade suppliers for its failure to make payment within stated terms of sale. These complaints have increased sharply in recent months. Two major suppliers have emphasized that they will have to put future shipments on a cash payment basis unless improvement in payment is made. Connection with several of these suppliers includes valuable franchises and distributorships. As a consequence, Mr. Drennan is eager to maintain good relations. After examining Ms. Zhang’s forecasts, Mr. Drennan has decided that the only solution to his problem is to obtain, as soon as possible, an increased loan from his bank of account, the Delaware Community Bank. OTI is currently borrowing $10,000 from the bank on six-month, unsecured, renewable notes. Mr. Drennan dislikes large-scale borrowing and had hoped to be able to avoid asking for an increase, but he is confident that the growing size of his business, together with its record of increasing profits, will prevail upon the bank to increase the loan to $100,000 for a few months. He believes that this amount will allow him to “clean up his balance sheet” and make it unnecessary to spend time constantly worrying about day-to-day financial problems such as trade credit payments and payrolls. He is also aware...