Assessing credit risk using cash flow forecasts (LO 7-7) Randall Manufacturing has requested a $2 million, four-year term loan from Farmers State Bank. It will use the money to expand its warehouse and to upgrade its assembly line. Randall supplied the followin cash flow forecasts as part of the loan application. ($ in thousands) Cash provided by operations Cash used for investing activities Cash used for financing activities Net change in cash 20X1 $685 (2,590) 2,000 $95 20X2 $715 (50) (100) $565 = 20X3 $720 Required: 1. As the bank's chief loan officer, what is your opinion about the degree of credit risk associated with this $2 million loan? 2. How can Randall Manufacturing lower its credit risk? (50) (100) $570 = 20x4 $735 (50) (100) $585 The forecasts assume that the loan is granted at the beginning of 20X1 and that $2.59 million will be spent that year on the expansion and upgrade. Randall plans to spend $50,000 each year to replace won out manufacturing equipment and $100,000 each year for dividends.

Assessing credit risk using cash flow forecasts (LO 7-7) Randall Manufacturing has requested a $2 million, four-year term loan from Farmers State Bank. It will use the money to expand its warehouse and to upgrade its assembly line. Randall supplied the followin cash flow forecasts as part of the loan application. ($ in thousands) Cash provided by operations Cash used for investing activities Cash used for financing activities Net change in cash 20X1 $685 (2,590) 2,000 $95 20X2 $715 (50) (100) $565 = 20X3 $720 Required: 1. As the bank's chief loan officer, what is your opinion about the degree of credit risk associated with this $2 million loan? 2. How can Randall Manufacturing lower its credit risk? (50) (100) $570 = 20x4 $735 (50) (100) $585 The forecasts assume that the loan is granted at the beginning of 20X1 and that $2.59 million will be spent that year on the expansion and upgrade. Randall plans to spend $50,000 each year to replace won out manufacturing equipment and $100,000 each year for dividends.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter7: Valuation Of Stocks And Corporations

Section: Chapter Questions

Problem 23SP

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