Question

You are a loan officer with Third Texas Bank. Dan Scott owns two successful restaurants, each of which has applied to your bank for a $250,000 one-year loan for the purpose of opening a second location. Condensed balance sheets for the two business entities are shown below.


Both restaurants are popular and have been successful over the past several years. Texas Steak
Ranch has been slightly more profitable, but the operating results for the two businesses have been quite similar. You think that either restaurant’s second location should be successful. On the other hand, you know that restaurants are a very “faddish” type of business and that their popularity and profitability can change very quickly.
Dan Scott is one of the wealthiest people in Texas. He made a fortune—estimated at more than $2 billion—as the founder of Micro Time, a highly successful manufacturer of computer software. Scott now is retired and spends most of his time at Second Life, his 50,000-acre cattle ranch. Both of his restaurants are run by experienced professional managers.
Instructions
a. Compute the current ratio and working capital of each business entity.
b. On the basis of the information provided in this case, which of these businesses do you con-sider to be the better credit risk? Explain fully.
c. What simple measure might you insist upon that would make the other business as good a credit risk as the one you identified in part b?Explain.


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  • CreatedApril 17, 2014
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