Explain the importance of identifying the “primary” source of repayment. Clearly, the primary source of repayment is always “cash.” The analysis question is really one of identifying the source of the cash used to repay the loan. Explain the advantages and disadvantages of the following sources of cash as the primary source of repayment on a loan:
Selling an asset Increasing a liability
Generating more sales Decreasing expenses
Issuing stock (equity) Reducing cash dividends
Under what circumstances would you be comfortable with the mentioned sources being the “primary” source of repayment?