Ride-in-Style, LLC, is a limousine service organized as a partnership by two equal owners, Jim Jones and
Question:
Ride-in-Style, LLC, is a limousine service organized as a partnership by two equal owners, Jim Jones and Rhoda Putnam. They wish to finance two new limousines with a $470,000 purchase price. The partners are able to make a $100,000 down payment to bring the requested loan to $370,000.
Net Worth | 294,000 |
Working Capital | 4,000 |
Loan-to-Value Ratio | 74% |
Debt Service Coverage Ratio | 0.89 |
Operating Expense Ratio | 40% |
Debt Yield Ratio | 11% |
Debt Ratio | 43.5% |
Operating Cash Flow/Net Sales | 7.4% |
Free Cash Flow (FCF) | 10,000 |
Comprehensive Free Cash Flow (CFCF) | 83.33% |
Loan B Details:
Hanson Dynamics, Inc. is a research company organized as a corporation by a single owner, Henry Hanson. The company wishes to finance a new office building with a $500,000 purchase price. The company is able to make a $200,000 down payment to bring the requested loan to $300,000.
Net Worth | 570,000 |
Working Capital | (30,000) |
Loan-to-Value Ratio | 60% |
Debt Service Coverage Ratio | 1.14 |
Operating Expense Ratio | 41.67% |
Debt Yield Ratio | 13.33 |
Debt Ratio | 57.22% |
Operating Cash Flow/Net Sales | 4.35% |
Free Cash Flow (FCF) | 8,000 |
Comprehensive Free Cash Flow (CFCF) | 32% |
Two loans are presented for underwriting on the last day of the month, loan A and loan B.The underwriter has the following options:
- Approve both loan A and loan B
- Approve loan A but not loan B
- Approve loan B but not loan A
- Deny both loan A and loan B
Choose your lending strategy (1, 2, 3 or 4) and comment on decision.
Managerial Accounting
ISBN: 978-1118385388
2nd edition
Authors: Ramji Balakrishnan, Konduru Sivaramakrishnan, Geoff B. Sprinkle