You have just been hired as a loan officer for Washington Mutual Savings. Selig Equipment and Mountain Bike Inc. have both applied for $125,000 nine-month loans to acquire additional plant equipment. Neither company offered any security for the loans. It is the strict policy of the bank to have only $1,350,000 outstanding in unsecured loans at any point in time. Because the bank currently has $1,210,000 in unsecured loans outstanding, it will be unable to grant loans to both companies. The bank president has given you the following selected information from the companies’ loan applications. Selig Equipment Mountain Bike Inc. Cash $15,000 $160,000 Accounts receivable 215,000 470,000 Inventory 305,000 195,000 Prepaid expenses 180,000 10,000 Total current assets $715,000 $835,000 Noncurrent assets 1,455,000 1,875,000 Total assets $2,170,000 $2,710,000 Selig Equipment Mountain Bike Inc. Current liabilities $285,000 $325,000 Long-term liabilities 950,000 875,000 Common stock 790,000 910,000 Retained earnings 145,000 600,000 Total liabilities and shareholders’ equity $2,170,000 $2,710,000 Sales $1,005,000 $1,625,000 Cost of goods sold 755,000 960,000 INSTRUCTIONS: Assume that all account balances on the balance sheet are representative of the entire year. Based on this limited information, which company would you recommend to the bank president as the better risk for an unsecured loan? Support your answer with any relevant analysis.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 19P

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P5.11 (LO 1, 3) You have just been hired as a loan officer for Washington Mutual Savings. Selig Equipment and Mountain Bike Inc. have both applied for $125,000 nine-month loans to acquire additional plant equipment. Neither company offered any security for the loans. It is the strict policy of the bank to have only $1,350,000 outstanding in unsecured loans at any point in time. Because the bank currently has $1,210,000 in unsecured loans outstanding, it will be unable to grant loans to both companies. The bank president has given you the following selected information from the companies’ loan applications.

	Selig Equipment	Mountain Bike Inc.
Cash	$15,000	$160,000
Accounts receivable	215,000	470,000
Inventory	305,000	195,000
Prepaid expenses	180,000	10,000
Total current assets	$715,000	$835,000
Noncurrent assets	1,455,000	1,875,000
Total assets	$2,170,000	$2,710,000

	Selig Equipment	Mountain Bike Inc.
Current liabilities	$285,000	$325,000
Long-term liabilities	950,000	875,000
Common stock	790,000	910,000
Retained earnings	145,000	600,000
Total liabilities and shareholders’ equity	$2,170,000	$2,710,000
Sales	$1,005,000	$1,625,000
Cost of goods sold	755,000	960,000

INSTRUCTIONS:

Assume that all account balances on the balance sheet are representative of the entire year. Based on this limited information, which company would you recommend to the bank president as the better risk for an unsecured loan? Support your answer with any relevant analysis.

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