Suppose that you have generated the estimates listed below from a pro forma analysis for a manufacturing
Question:
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. The borrower proposed the followingprincipalrepayment schedule due to the COVID-19 (repay less in early years and more in later years):
$300,000 at the end of Year 1
$500,000 at the end of Year 2
$700,000 at the end of Year 3
The loan interest is also payable at the end of each year with interest calculated against outstanding principal at a rate of 12 percent due to the heightened default risk caused by the COVID-19.
Will the firm's cash flow from operations before interest be sufficient to meet debt service requirements and dividend payouts?
A.Sufficient in Year 1, but insufficient in Year 2 and 3
B.Sufficient in Year 1 and 2, but insufficient in Year 3
C.Sufficient in all three years
D.Insufficient in all three years