on january 1 acme aglet corporation is contemplating a four year 3 million term loan 704922

On January 1, Acme Aglet Corporation is contemplating a four year, $3 million term loan from the Fidelity First National Bank. The loan is payable at the end of the fourth year and would involve a loan agreement that would contain a number of protective covenants. Among these restrictions are that the company must maintain net working capital (current assets minus current liabilities) of at least $3 million at all times, that it cannot take on

any more long term debt, that its total liabilities cannot be more than 0.6 of its total assets, and that capital expenditures in any year are limited to depreciation plus $3 million. The company’s balance sheet at December 31, before the term loan, is as follows (in millions):

The proceeds of the term loan will be used to increase Acme Aglet’s investment in inventories and accounts receivables in response to introducing a new “fit to be tied” metal aglet. The company anticipates a subsequent need to grow at a rate of 24 percent a year, equally divided between current assets and net fixed assets. Profits after taxes of $1.5 million are expected this year, and these profits are expected to grow by $250,000 per year over

the subsequent three years. The company pays no cash dividends and does not intend to pay any over the next four years. Depreciation in the past year was $2.5 million, and this is predicted to grow over the next four years at the same rate as the increase in net fixed assets.

Under the loan agreement, will the company be able to achieve its growth objective? Explain numerically.