Question
Suppose that you have generated the estimates listed below from a pro forma analysis for a manufacturing company that had requested a threeyear term loan.
Suppose that you have generated the estimates listed below from a pro forma analysis for a manufacturing company that had requested a threeyear term loan. The loan is a $1.5 million term loan with equal annual principal payments. Principal and interest are payable at the end of each year with interest calculated against outstanding principal at a rate of prime plus 2 percent.
a. The prime rate averages 8 percent each year. Will the firms cash flow from operations before interest be sufficient to meet debt service requirements and other mandatory expenditures?
b. If prime averages 8 percent, 9 percent, and 10 percent over the three years, respectively, will cash flow be sufficient?
Year 1Year 2 Year 3 Capital expendituresS250,000 125,000 75,000 140,000$140,000 $140,000 $750,000 $780,000 $800,000 Cash dividends Cash flow from operations before interest expenseStep by Step Solution
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