Supplys Financial Information (including Income and Balance Sheet Spreads, and UCA Cash Flow Worksheet). The documents are located at the end of the textbook chapter.

Question 1

Background

The use of Dry Supply, Inc. as a case study continues with this exercise. 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 business 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 banks 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 daughters, who are the current owners and managers of the company. Four grandchildren also are employed by the company. In short, this is a family-run 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. Historically, 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 financial analysis of the reviewed financial statements submitted by Dry Supply. As requested, the company also provided items such as an aged listing of accounts receivable and details on product mix behind the sales results. Earlier, Schippel sent credit information letters to banks where Dry Supply maintained accounts.

Dry Supplys Fixed Assets

The fixed assets for Dry Supply are summarized on the next slide. The company does not own its land or building. Fixed assets are composed primarily of company vehicles and equipment used to test products. With fixed assets heavily depreciated, the lender better understands the request for new equipment. In 20xz, Dry Supply added a used delivery truck at a cost of $15,000.

Proposed Loan Request

Dry Supply owner Kaitlyn Nieson has requested approximately $60,000 to purchase three new delivery vans in the coming year.

Question 1

Using the financial information from the Chapter 5 Appendix and what you have learned about loan structuring, answer the following questions.

1. Is this loan consistent with the profile of a typical wholesaler?
2. Based on the purpose of the loan and the use of the funds, what type of borrowing arrangement(s) is (are) most appropriate?
3. Using the financial data, what are the feasible repayment terms for Dry Supply for the appropriate borrowing arrangement you identified?

Save your answers in a Word Document called Ch5_Ex_your name Make sure to list your questions under the heading Question 1 on your document and continue to Question 2.

Question 2

Background

As you recall, Dry Supply has requested a loan of $60,000 to purchase three new delivery vans in the coming year. On December 31, 20xz, Dry Supply borrowed $67,000 from owner Kaitlyn Nieson. To provide support to the loan request, in addition to the person 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 the financial information you have for this exercise and what you have learned about guarantees and subordination agreements.

1. What are two ways that State Bank can ask that the loan from Dry Supply be subordinated?
2. What steps can State Bank take if Ms. Nieson has secured her debt with a lien on a specific piece of equipment?

APPENDIX A: DRY SUPPLY'S FINANCIAL INFORMATION Income Statement Spread: Dry Supply Income Statement Review ($ in $000) 12/31/20xx Amount % Review 12/31/20xy Amount % Review 12/31/20xz Amount % 100.0 $937 100.0 $918 100.0 $895 645 72.1 667 71.2 631 68.7 250 27.9 270 28.8 287 31.3 157 17.5 173 18.5 180 19.6 36 4.0 31 3.3 28 3.1 Net sales Cost of goods sold Gross profit Selling, gen and admin. expense Officer's compensation Rent expenses Bad debt expense Profit-sharing expense Depreciation expense Total operating expenses Operating income Other income 15 1.7 18 1.9 20 2.2 2. 0.2 1 0.1 0 0.0 7 7 0.8 7 0.7 0 0 0.0 12 1.3 12 13 1.4 1.3 25.8 229 25.6 242 241 26.3 21 2.3 28 3.0 46 5.0 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 3 0.3 6 0.7 7 0.7 11 1.2 20 2.2 26 2.8 40 4.4 Interest expense Net profit before tax Income tax expenses Net profit after tax 11 1.2 12 1.3 17 1.9 $ 9 1.0 S 14 1.5 $ 23 2.5 Balance Sheet Spread: Dry Supply Common size report Review ($ in $000) 12/31/20xx Assets Amount % Review 12/31/20xy Review 12/31/20xz Amount % Amount % $ 3 $ 12 8.1 1.2 46.9 4.6 45.4 $ 22 117 114 118 Cash Accounts receivable Less: allowance for doubtful accounts 43.3 5 2.1 5 1.9 5 1.9 Net accounts receivable 109 44.9 113 43.5 112 41.5 73 30.0 72 27.7 67 24.8 185 76.1 197 75.8 201 74.4 76 31.3 75 28.8 78 28.9 1 0.4 1 1 0.4 0 0.0 53 21.8 70 26.9 85 31.5 Inventory Total current assets Furniture and fixtures Leasehold improvements Transportation equipment Gross fixed assets Less: Accum. depreciation Net fixed assets Cash-value life insurance Total assets 130 53.5 146 56.2 163 60.4 85 35.0 97 37.3 110 40.7 45 49 18.8 53 19.6 13 18.5 5.3 100.0 14 5.4 16 5.9 $243 $260 100.0 $270 100.0 Review 12/31/20xx Review 12/31/20xy Review 12/31/20xz Amount % Amount % Amount % $81 33.3 $68 26.2 $59 21.8 42 17.3 46 17.7 31 11.5 5 2.1 6 2.3 7 2.6 Common size report ($ in S000) Liabilities Notes payable bank short-term Accounts payable - trade Income taxes payable Accrued bonuses Total current liabilities Subordinated debt - officers Total liabilities Net Worth Common stock 10 4.1 11 4.2 12 4.4 138 56.8 131 50.4 109 40.4 48 19.8 58 22.3 67 24.8 186 76.5 189 72.7 176 65.2 2 0.8 2 0.8 2 0.7 55 22.6 69 26.5 92 34.1 Retained earnings Total net worth 57 23.5 71 94 34.8 27.3 100.0 Total liabilities and net worth $243 100.0 $260 $270 100.0 Dry Supply UCA Cash Flow Worksheet 20xz $918 $113 112 $_1 $933 $919 ($631) $ 72 67 $ 5 $ 31 46 ($ 15) ($662) ($641) ($228) $ 12 11 $ 1 ($229) ($227) $ 5 ($ 0) $ 5 $ 5 ($ 17) $ 7 $ $1 Dry Supply UCA Cash Flow Worksheet for 20xy ($ in $000s) 20xy net sales $937 + 20xx accounts receivable $109 20xy accounts receivable 113 + Accounts receivable (increase) decrease = Cash from sales 20xy cost of goods sold (net of depreciation) ($667) + 20xx inventory $ 73 - 20xy inventory 72 + Inventory (increase) decrease $ 1 20xy accounts payable $ 46 20xx accounts payable 42 + Accounts payable increase (decrease) $ 4 = Cash production costs 20xy selling, gen. & admin. exp. (net of deprec.) ($230) + 20xy accrued expenses $ 11 20xx accrued expenses 10 + Accrued expenses increase (decrease) - Cash operating expenses 20xy other income $ 5 20xy other expenses ($ 0 = Total miscellaneous 20xz income tax expense ($ 12) + 20xy income taxes payable $ 6 20xx income taxes payable 5 Income taxes payable increase (decrease) $ 1 = Cash paid for taxes NET CASH AFTER OPERATIONS 20xy interest expense ($ 7) 20xy dividends or distributions 0 = Financing costs = Net cash income - 20xx CMLTD CASH AFTER DEBT AMORTIZATION 20xy depreciation expense ($ 12) + 20xx net fixed assets $ 45 - 20xy net fixed assets 49) Other current assets (increase) decrease ($ 4) = Capital expenditures ($ 16) + 20xx investments (CSVLI) 13 - 20xy investments (CSVLI) (14) = Tatal long-term investments FINANCING SURPLUS (REQUIREMENT) - 20xx notes payable bank short-term ($ 81) +20xy notes payable bank short-term 68 + Short-term debt increase (decrease) ($ 13) +20xy CMLTD S 0 + 20xy long-term debt 58 - 20xx long-term debt (48) + Incremental long-term debt $ 10 - 20xx stockholders equity (excl. ret, earnings) ($ 2) + 20xy stockholders equity (excl. ret. earnings) 2 + stockholders equity increase (decrease) TOTAL EXTERNAL FINANCING CASH AFTER EXTERNAL FINANCING ($ 11) S 36 ($ 16) $ 40 ($ 11) 0 (S 11) $ 29 $ 29 ($ 0 $ 29 ($0) $ 29 ($ 13) $ 49 (53) ( S4) ($ 17) 14 (16) ($ 17) $ 12 ($ 19) $ 10 ($ 68) 59 ($ 9) $ 0 67 (58) $ 9 ($ 2) - 2 2 $ 0 $ 0 ($ 3) $ 9 $0 $ 10 APPENDIX A: DRY SUPPLY'S FINANCIAL INFORMATION Income Statement Spread: Dry Supply Income Statement Review ($ in $000) 12/31/20xx Amount % Review 12/31/20xy Amount % Review 12/31/20xz Amount % 100.0 $937 100.0 $918 100.0 $895 645 72.1 667 71.2 631 68.7 250 27.9 270 28.8 287 31.3 157 17.5 173 18.5 180 19.6 36 4.0 31 3.3 28 3.1 Net sales Cost of goods sold Gross profit Selling, gen and admin. expense Officer's compensation Rent expenses Bad debt expense Profit-sharing expense Depreciation expense Total operating expenses Operating income Other income 15 1.7 18 1.9 20 2.2 2. 0.2 1 0.1 0 0.0 7 7 0.8 7 0.7 0 0 0.0 12 1.3 12 13 1.4 1.3 25.8 229 25.6 242 241 26.3 21 2.3 28 3.0 46 5.0 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 3 0.3 6 0.7 7 0.7 11 1.2 20 2.2 26 2.8 40 4.4 Interest expense Net profit before tax Income tax expenses Net profit after tax 11 1.2 12 1.3 17 1.9 $ 9 1.0 S 14 1.5 $ 23 2.5 Balance Sheet Spread: Dry Supply Common size report Review ($ in $000) 12/31/20xx Assets Amount % Review 12/31/20xy Review 12/31/20xz Amount % Amount % $ 3 $ 12 8.1 1.2 46.9 4.6 45.4 $ 22 117 114 118 Cash Accounts receivable Less: allowance for doubtful accounts 43.3 5 2.1 5 1.9 5 1.9 Net accounts receivable 109 44.9 113 43.5 112 41.5 73 30.0 72 27.7 67 24.8 185 76.1 197 75.8 201 74.4 76 31.3 75 28.8 78 28.9 1 0.4 1 1 0.4 0 0.0 53 21.8 70 26.9 85 31.5 Inventory Total current assets Furniture and fixtures Leasehold improvements Transportation equipment Gross fixed assets Less: Accum. depreciation Net fixed assets Cash-value life insurance Total assets 130 53.5 146 56.2 163 60.4 85 35.0 97 37.3 110 40.7 45 49 18.8 53 19.6 13 18.5 5.3 100.0 14 5.4 16 5.9 $243 $260 100.0 $270 100.0 Review 12/31/20xx Review 12/31/20xy Review 12/31/20xz Amount % Amount % Amount % $81 33.3 $68 26.2 $59 21.8 42 17.3 46 17.7 31 11.5 5 2.1 6 2.3 7 2.6 Common size report ($ in S000) Liabilities Notes payable bank short-term Accounts payable - trade Income taxes payable Accrued bonuses Total current liabilities Subordinated debt - officers Total liabilities Net Worth Common stock 10 4.1 11 4.2 12 4.4 138 56.8 131 50.4 109 40.4 48 19.8 58 22.3 67 24.8 186 76.5 189 72.7 176 65.2 2 0.8 2 0.8 2 0.7 55 22.6 69 26.5 92 34.1 Retained earnings Total net worth 57 23.5 71 94 34.8 27.3 100.0 Total liabilities and net worth $243 100.0 $260 $270 100.0 Dry Supply UCA Cash Flow Worksheet 20xz $918 $113 112 $_1 $933 $919 ($631) $ 72 67 $ 5 $ 31 46 ($ 15) ($662) ($641) ($228) $ 12 11 $ 1 ($229) ($227) $ 5 ($ 0) $ 5 $ 5 ($ 17) $ 7 $ $1 Dry Supply UCA Cash Flow Worksheet for 20xy ($ in $000s) 20xy net sales $937 + 20xx accounts receivable $109 20xy accounts receivable 113 + Accounts receivable (increase) decrease = Cash from sales 20xy cost of goods sold (net of depreciation) ($667) + 20xx inventory $ 73 - 20xy inventory 72 + Inventory (increase) decrease $ 1 20xy accounts payable $ 46 20xx accounts payable 42 + Accounts payable increase (decrease) $ 4 = Cash production costs 20xy selling, gen. & admin. exp. (net of deprec.) ($230) + 20xy accrued expenses $ 11 20xx accrued expenses 10 + Accrued expenses increase (decrease) - Cash operating expenses 20xy other income $ 5 20xy other expenses ($ 0 = Total miscellaneous 20xz income tax expense ($ 12) + 20xy income taxes payable $ 6 20xx income taxes payable 5 Income taxes payable increase (decrease) $ 1 = Cash paid for taxes NET CASH AFTER OPERATIONS 20xy interest expense ($ 7) 20xy dividends or distributions 0 = Financing costs = Net cash income - 20xx CMLTD CASH AFTER DEBT AMORTIZATION 20xy depreciation expense ($ 12) + 20xx net fixed assets $ 45 - 20xy net fixed assets 49) Other current assets (increase) decrease ($ 4) = Capital expenditures ($ 16) + 20xx investments (CSVLI) 13 - 20xy investments (CSVLI) (14) = Tatal long-term investments FINANCING SURPLUS (REQUIREMENT) - 20xx notes payable bank short-term ($ 81) +20xy notes payable bank short-term 68 + Short-term debt increase (decrease) ($ 13) +20xy CMLTD S 0 + 20xy long-term debt 58 - 20xx long-term debt (48) + Incremental long-term debt $ 10 - 20xx stockholders equity (excl. ret, earnings) ($ 2) + 20xy stockholders equity (excl. ret. earnings) 2 + stockholders equity increase (decrease) TOTAL EXTERNAL FINANCING CASH AFTER EXTERNAL FINANCING ($ 11) S 36 ($ 16) $ 40 ($ 11) 0 (S 11) $ 29 $ 29 ($ 0 $ 29 ($0) $ 29 ($ 13) $ 49 (53) ( S4) ($ 17) 14 (16) ($ 17) $ 12 ($ 19) $ 10 ($ 68) 59 ($ 9) $ 0 67 (58) $ 9 ($ 2) - 2 2 $ 0 $ 0 ($ 3) $ 9 $0 $ 10