Making a Loan Decision Assume that you are a loan officer in charge of reviewing loan applications from potential new clients at a major bank. You are considering an application from Molitor Corporation, which is a fairly new company with a limited credit history. It has provided a balance sheet for its most recent fiscal year as follows:

Your bank has established certain guidelines that must be met before it will make a favorable loan recommendation. These include minimum levels for several financial ratios. You are particularly concerned about the bank€™s policy that loan applicants must have a total-assets-to-debt ratio of at least 2 to 1 to be acceptable. Your initial analysis of Molitor€™s balance sheet indicates that the firm has met the minimum total-assets-to-debt ratio requirement. On reading the notes that accompany the financial statements, however, you discover the following statement:
Molitor has engaged in a variety of innovative financial techniques resulting in the acquisition of $200,000 of assets at very favorable rates. The company is obligated to make a series of payments over the next five years to fulfill its commitments in conjunction with these financial instruments. Current GAAP do not require the assets acquired or the related obligations to be reflected on the financial statements.

Required
1. How should this note affect your evaluation of Molitor€™s loan application? Calculate a revised total-assets-to-debt ratio for Molitor.
2. Do you believe that the bank€™s policy concerning a minimum total-assets-to-debt ratio can be modified to consider financing techniques that are not reflected on the financial statements? Write a statement that expresses your position on thisissue.

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Molitor Corporation Balance Sheet December 31, 2010 Assets Liabilities $100,000 200,000 Cash Receivables Inventory Equipment S 10,000 50,000 100,000 500,000 Accounts payable Notes payable Stockholders' Equity Common stock Retained earnings 80,000 280,000 Total liabilities and Total assets stockholders' equity S660,000