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EXERCISE 1 Background This textbook has used Dry Supply, Inc., as a case study. Dry Supply is a wholesaler of dry cleaning equipment, cleaning supplies, and laundry soap. The company, which is located in central Kansas, has been in business over 50 years. Anne Schippel is a busia ness banker and, in conjunction with her manager, has determined that this business is consistent with the industries targeted by her bank, as well as being within the bank's designated market area. She has made a couple of introductory calls and knows that Dry Supply was founded in 1949 by the father, who sold it 20 years later to his daugh- ters, who are the current owners and managers of the company. Four grandchildren also are employed by the company. In short, this is a familyrun business and likely to remain so in the foreseeable future. Dry Supply began as a wholesaler of powdered laundry products. Twenty years later, the operation changed its focus to dry cleaning supplies, such as liquid cleaners, plastic bags, and metal hangers. The company continues in that capacity today. Histora ically, the company has had a very good operating and credit record, and a review of its dealings with suppliers and customers reveals no notable problems. Financial analysis summary Schippel has conducted a full nancial analysis of the reviewed nancial statements submitted by Dry Supply. As needed, the company also provided items such as an aged listing of accounts receivable and details on product mix behind the sales results. Pre viously, you saw that Schippel had sent credit information letters to banks where Dry Supply has maintained accounts. Dry Supply's xed assets The xed assets for Dry Supply are summarized below. The company does not own its land or building. Fixed assets are composed primarily of company vehicles and equip ment used to test products. W/ith xed assets heavily depreciated, the lender better understands the request for new equipment. In 20x2, Dry Supply added a used delivery truck at a cost of$15,000. Dry Supply Fixed Assets as of December 31 ($ In 0003) 20xx 20xy Furniture and xtures $76 31.3% $75 28.8% Leasehold improvements 1 0.4% 1 0.4% Transportation equipment 53 21 .8% 70 26.9% Gross xed assets $130 53.5% $146 56.2% Less: Accum. depreciation 85 35.0% 97 37.3% Net xed assets $45 18.5% $49 18.8% Percent depreciated 65.0% 66.0% Proposed loan request Dry Supply owner Kaitlyn Nieson has requested approximately $60,000 to purchase three new delivery vans in the coming year. Instructions Dry Supply's income and balance sheet spreads, plus the company's UCA cash ow model are provided in Appendix A. Answer the following questions using Dry Supply's nancial information and what you have studied about loan structuring. 1. Is this loan request consistent with the prole of a typical wholesaler? 2. Based on the purpose of the loan and the use of funds, what type of borrowing arrangement(s) is (are) most appropriate? 3. Using the nancial data, what are feasible repayment terms for Dry Supply for the appropriate borrowing arrangement you identied? EXERCISE 2 Background As you recall, Dry Supply has requested a loan of approximately $60,000 to purchase three new delivery vans in the coming year. On December 3], 20x1, Dry Supply had borrowed $67,000 from owner Kaitlyn Nieson. To provide support to the loan request, in addition to the personal guarantees of the owners, State Bank may ask Ms. Nieson to subordinate to the bank the debt owed to her from Dry Supply. Instructions Answer the following questions using Dry Supply's nancial information and apply what you have learned about guarantees and subordination agreements. If needed, you can refer to the income statements and balance sheets for Dry Supply in Appendix A. 1. \What are two ways that State Bank can ask that the loan from Dry Supply be sub- ordinated? 2. What steps can State Bank take if Ms. Nieson has secured her debt with a lien on a specic piece of equipment? APPENDIX A: DRY SUPPLY'S FINANCIAL INFORMATION Income Statement Spread: Dry Supply Income Statement Review Review Review ($ in $000) 12/31/20xx 12/31/20xy 12/31/20xz Amount % Amount Amount Net sales $895 100.0 $937 100. $918 100.0 Cost of goods sold 645 72.1 667 71.2 631 68.7 Gross profi 250 27.9 270 28.8 287 31.3 Selling, gen. and admin. 17.5 173 18.5 19.6 expense 157 180 Officer's compensation 36 4.0 31 3.3 28 3.1 Rent expense 15 1 .7 18 1.9 20 2.2 Bad debt expense 2 0.2 1 0.1 0 0.0 Profit-sharing expense 7 0 .8 7 0.7 0 0.0 Depreciation expense 12 1.3 12 1.3 13 1.4 Total operating expenses 229 25.6 242 25.8 241 26.3 Operating income 21 2.3 28 3.0 46 5.0 Other income 0 0.0 0 0.0 0 0.0 Interest income 2 0.2 2 0.2 2 0.2 Rental income 3 0.3 3 0.3 31 0.3 Interest expense 6 0 .7 7 0.7 11 1.2 Net profit before tax 20 2.2 26 2.8 40 4.4 Income tax expenses 11 1.2 12 1.3 17 1.9 Net profit after tax $ 9 1.0 $ 14 1.5 $ 23 2.5 Balance Sheet Spread: Dry Supply Common size report Review Review Review ($ in $000) 12/31/20xx 12/31/20xy 12/31/20xz Assets Amount % Amount Amount o/ Cash 3 1.2 $ 12 4.6 $ 22 8.1 Accounts receivable 114 46.9 118 45.4 117 43.3 Less: allowance for doubtful 5 accounts 2.1 5 1.9 5 1.9 Net accounts receivable 109 14.9 113 43.5 112 41.5 Inventory 73 30.0 72 27.7 67 24.8 Total current assets 185 76.1 197 75.8 201 74.4 Furniture and fixtures 76 31.3 75 28.8 78 28.9 Leasehold improvements 1 0.4 1 0.4 0 0.0 Transportation equipment 53 21.8 70 26.9 85 31.5 Gross fixed asset 130 53.5 146 56.2 163 60.4 Less: Accum. depreciation 85 35.0 97 37.3 110 40.7 Net fixed assets 45 18.5 49 18.8 53 19.6 Cash-value life insurance 13 5.3 14 5.4 16 5.9 Total assets $243 100.0 $260 100.0 $270 100.0Common size report Review Review Review ($ in $000) 12/31/20Xx 12/31/20xy 12/31/20xz Liabilities Amount Amount 0/ Amount Notes payable bank short-term $81 33.3 $68 26.2 $59 21.8 Accounts payable - trad 42 17.3 46 17.7 31 11.5 Income taxes payable 5 2.1 6 2.3 7 2.6 10 4.1 11 4.2 12 4.4 Accrued bonuses Total current liabilities 138 56.8 131 50.4 109 40.4 Subordinated debt - officers 48 19.8 58 22.3 67 24.8 Total liabilities 186 76.5 189 72.7 176 65.2 Net Worth Common stock 2 0.8 0.8 0.7 IN 2 Retained earnings 55 22.6 69 26.5 92 34.1 Total net worth 57 23.5 71 27.3 94 $4.8 Total liabilities and net worth $243 100.0 $260 100.0 $270 100.0Dry Supply UCA Cash Flow Worksheet Dry Supply UCA Cash Flow Worksheet for 20xy ($ in $000s) 20xz 20xy net sales $937 $918 + 20xx accounts receivable $109 $113 -20xy accounts receivable 113 112 + Accounts receivable (increase) decrease ($ 4) $ 1 = Cash from sales $933 $919 20xy cost of goods sold (net of depreciation) $667) ($631) + 20xx inventory $ 73 $ 72 - 20xy inventory 72 67 + Inventory (increase) decrease $ $ 5 + 20xy accounts payable $ 46 5 31 - 20xx accounts payable 42 46 + Accounts payable increase (decrease) $ 4 ($ 15) = Cash production cost ($662) ($641) 20xy selling, gen. & admin. exp. (net of deprec.) ($230) ($228) + 20xy accrued expenses $ 11 $ 12 - 20xx accrued expenses 10 11 + Accrued expenses increase (decrease) $ $ 1 = Cash operating expenses ($229) ($227) 20xy other income $ 5 $ 5 20xy other expenses $ 0) ($ 0 = Total miscellaneous 5 $ 5 20xz income tax expense ($ 12 ($ 17) + 20xy income taxes payable $ 6 $ 7 - 20xx income taxes payable 5 6 + Income taxes payable increase (decrease) $ 1 $ 1 = Cash paid for taxes ($ 11) ($ 16) NET CASH AFTER OPERATIONS $ 36 $ 40 20xy interest expense $ 7 ($ 11) dividends or 0 = Financing costs ($ 7 ($ 11 = Net cash income $ 29 $ 29 - 20xx CMLTD ($ 0) ($ 0) CASH AFTER DEBT AMORTIZATION $ 29 $ 29 20xy depreciation expense ($ 12) ($ 13) + 20xx net fixed assets $ 45 $ 49 - 20xy net fixed assets (49) ( 53) Other current assets (increase) decrease ($ 4) ($ 4) = Capital expenditures ($ 16) $ 17 + 20xx investments (CSVLI) 13 14 -20xy investments (CSVLI) ( 14 ) ( 16) = Fatal long-term investments ($ 17) ($ 19) FINANCING SURPLUS (REQUIREMENT) $ 12 $ 10 - 20xx notes payable bank short-term ($ 81) $ 68) 20xy notes payable bank short-term 68 59 + Short-term debt increase (decrease) ($ 13) 9 + 20xy CMLTD $ 0 $ 0 + 20xy long-term debt 58 67 - 20xx long-term debt (48 58) Incremental long-term debt $ 10 9 - 20xx stockholders equity (excl. ret. earnings) ($ 2) $ 2) + 20xy stockholders equity (excl. ret. earnings) 2 2 + stockholders equity increase (decrease) $ 0 $ 0 TOTAL EXTERNAL FINANCING ( $ 3 ) CASH AFTER EXTERNAL FINANCING $ $ 10
