Help answer this question please LOI4-3, through LO14-5 You are a loan officer w
ID: 2573238 • Letter: H
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Help answer this question please
LOI4-3, through LO14-5 You are a loan officer with Third Nebraska Bank. Joe West owns two successful restaurants, eaclh CASE 14.2 Evaluating Debt-Paying Ability of which has applied to your bank for a S250,000 one-year loan for the purpose of opening a sec- ond location. Condensed balance sheets for the two business entities are shown below. NEBRASKA STEAK RANCH BALANCE SHEET DECEMBER 31, 2015 Assets Liabilities & Stockholders' Equity Current liabilities . 00,000 onerm liabilities Total liabilities & stockholders' equity. $375,000 $375,000Explanation / Answer
a. i. Current Ration = Current Assets / Current Liabilities
NEBRASKA STEAK RANCH's Current Ratio = $75,000 / $30,000 = 2.5
THE STOCKYARD's Current Ratio = $24,000 / $30,000 = 0.80
ii. Working Capital = Current Assets - Current Liabilities
NEBRASKA STEAK RANCH's working capital = $ 75,000 - $ 30,000 = $ 45,000
THE STOCKYARD's working capital = $ 24,000 - $ 30,000 = - $ 6,000
b. NEBRASKA STEAK RANCH is consider to be better credit risk than THE STOCKYARD's b'coz
i. Current ration of 2.5 indicate that NEBRASKA STEAK RANCH is in well position to cover its current or short term liability. Current ration of 0.80 is indicate that THE STOCKYARD is running business in financial difficulty.
ii. Better current ration indicate company's liquidity position. Better ration means better liquidity and minimum risk.
iii. Negetive working capital indicate that THE STOCKYARD is in high financial crises and not able to complete its immediate operational needs and highly depend on the borrowed fund.
iv. NEBRASKA STEAK RANCH's balance sheet showing retained earning of $ 45,000. Retained earning is amount set apart from net earning (Profit) for reinvesting purpose or to pay debts. It is minimising credit risk of NEBRASKA STEAK RANCH.
c. Measure to make business as Good as Credit Risk
THE STOCKYARD having fixed asset of $ 301,000 to minimise bank's credit risk would like to suggest to take hypothication of security (fixed asset) against loan.
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