Question

Bonanza Inc. (Bonanza) is a small manufacturer of home environmental products such as humidifiers, air cleaners, and ionizers. Bonanza's products are sold in retail stores across Canada and in the United States. Bonanza's product line has been well received by consumers over the years, although many products haven't changed for many years. The president is concerned that the company cash position has been deteriorating in recent years and she has approached your organization for a significant loan to provide the company with additional working capital, as well as to purchase capital assets that need to be replaced. The president has provided income statements and balance sheets for the most recent years.

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Additional information:
• The long-term debt is due to be repaid in early 2019. The amount is owed to a large bank and is secured against certain capital assets.
• Capital asset purchases are paid for in cash.
• Bonanza has a $260,000 line of credit available from its bank. Bank loans represent the amount borrowed against the line of credit.
• All sales to customers and purchases of inventory are made on credit.
• Interest expense is included in selling, general, and administrative expenses.
Interest expense was $115,000 in 2017, $102,000 in 2016, and $48,000 in 2015.

Required:
Prepare a report to the corporate lending department evaluating the liquidity and solvency of Bonanza. Provide a preliminary recommendation on whether the loan should be made. Provide support for your recommendation. What additional information would you want before reaching a final decision on the loan application? In your analysis, consider Bonanza's cash flow.



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  • CreatedFebruary 26, 2015
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