Transaction Exposure and Credit Analysis You were recently hired as a credit analyst at a large financial

Question:

Transaction Exposure and Credit Analysis You were recently hired as a credit analyst at a large financial institution. You have assembled the following information for Poole Corporation.

Additional information:
1. Net income reported for 2013 was $150 million.
2. Depreciation expense was $50 million.
3. Noncash working capital increased by $40 million, including $25 million of unrealized exchange gains accruing on foreign currency denominated current assets ($11 million) and liabilities ($14 million).
4. Unrealized exchange gains on long-term debt, $22 million.
5. Inventory includes $100 million in items normally sold to customers in Argentina for 500 million Argentina pesos; estimated sales value at the current spot rate of $.35/peso is $175 million.
6. Poole's various disclosures indicate no hedging of foreign currency exposures.
Required
a. One dimension of earnings quality is nearness to cash. Using the information given, calculate cash flow from operations to assess this dimension of earnings quality.
b. Sales to international customers are denominated in a highly volatile foreign currency. The dollar is forecast to strengthen relative to this currency during 2014, with the spot rate possibly falling to $0.20/ peso. Discuss the likely effect of this development on Poole's cash flow.
c. Describe the measures you would like to see Poole undertake to raise your level of comfort before making a loan to the company.