# Question: Suppose that you have generated the estimates listed below from

Suppose that you have generated the estimates listed below from a pro forma analysis for a manufacturing company that had requested a three- year term loan. The loan is a \$ 1.5 million term loan with equal annual principal payments. Principal and interest are payable at the end of each year with interest calculated against outstanding principal at a rate of prime plus 2 percent.
Year 1 Year 2 Year 3
Capital expenditures \$ 250,000 \$ 125,000 \$ 75,000
Cash dividends \$ 140,000 \$ 140,000 \$ 140,000
Cash flow from operations \$ 750,000 \$ 780,000 \$ 800,000
before interest expense
a. The prime rate averages 8 percent each year. Will the firm’s CFO before interest be sufficient to meet debt service requirements and other mandatory expenditures?
b. If prime averages 8 percent, 9 percent, and 10 percent over the three years, respectively, will cash flow be sufficient?

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• CreatedNovember 03, 2015
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