Chapter 16 Problems

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Chapter 16 Problems 2. Cash Flow = Sales Revenue – Cost of Goods Sold – Selling and administration expenses – taxes paid in cash + depreciation and other non cash expenses For 20X1 Cash flow was $1.6 million For 20X2 cash flow was $1.6 million For 20X3 cash flow was $1.7 million For 20X4 cash flow was $1.7 million Cash flow projected for next year is $1.8 million The trends of this bank show an increase in in sales revenue with a comparable increase in cost of goods sold. The selling of administrative expenses has also increased linearly meaning that, because the company is selling more product (or selling it at a higher price) it may need to higher more management. Another good sign for this company is seen in the recent leveling out of the taxes paid in cash. Although taxes spiked between X2 and X3, they seem to have leveled off at 4.8 million dollars. If I were in charge of renewing this firm’s line of credit, I would renew it at the $12 million requested because they have shown an increase in net income and have proven that they are a profitable business. 3. Basic information about Parvis Manufacturing and Service Company: Inventory: $30,000,000 Accounts Receivable: $24,650,000 The textbook states that, for collateral, banks will use 40 to 90 percent of Accounts Receivable and 30 to 80 percent of inventory. Given that information, the minimum loan Parvis Manufacturing and Service Company is likely to receive from a lender is $18,860,000. While the maximum loan Parvis Manufacturing and Service Company is likely to receive from a lender is $46,185,000 4. a. First National Bank discovers there is a lien against the fixed assets of one of its customers asking for a loan – collateral. c. John Selman has an excellent credit rating – character. d. Smithe Manufacturing Company has achieved higher earnings each year for the past six years – cashflow.

f. Merchants Center National Bank is concerned about extending a loan for another year to Corrin Motors because a recession is predicted in the economy – conditions. g. Wes Velman has gotten his brother, Charles, to volunteer to cosign the note the loan should be approved – Character. h. ABC finance company checks out Mary Earl’s estimate of her monthly take home pay with Mary’s employer, Bryan sims Doors and Windows – cashflow. i. Hillsoro Bank and Trust would like to make a loan to Pen-Tab oil and Gas Company but fears a long-term decline in oil and gas prices – conditions. j. First State Bank of Jackson seeks the opinion of an economic expect on the economic outlook in Mexico before granting a loan to a Mexican manufacturer of auto parts – conditions. k. The history of Membranes – Conditions. (Change in leadership) l. Collateral. 5. Analysis of Butell Manufacturing There are three primary issues that indicate a developing loan problem. The first issue is that their cash account has decreased from $57 million last month to $33 million dollars in the current month. The impact of this is seen in the liquidity ratio which has decreased from 1.23x to 1.10x. This could spell a major problem for the bank given economic downturn. The final issue that indicates a developing loan problem based on the statistics given is the leveling out of sales revenue. Butell has been unable to increase the amount of money they are bringing in and their cash reserves are decreasing – this is a recipe for financial hardship. Aside from the numbers, the manufacturing firm has realized that they are suffering financially and will now be forced to potentially cut dividends – this will drive away investors leaving Butell Manufacturing in an even less stable position. 6. a. This is a negative covenant because Nige Trading Corporation is behind prohibited from paying dividends above $3 per share without express lender approval. b. This is an affirmative covenant because HoneySmith Corporation must take action in order to uphold their end of the agreement. c. This is a negative covenant because it prohibits them from taking on any more debt. d. This is an affirmative covenant because the manufacturing company must file comprehensive statements to its principle bank. e. This is a negative covenant because lender approval must be secured before increasing its stock of fixed assets. f. This is an affirmative covenant because crestwin services must keep a minimum liquidity ratio.

g. This is a negative covenant because the merger is prohibited until express permission is granted.

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