The Bank of the Midwest is a small retail and commercial lender located in a rural, midwest county. The commercial underwriter at the Bank of the Midwest is presented with a lending situation. The underwriter has a monthly loan approval maximum of $

$7$

$$million$.$ As of the last day of the month, $

$6$

$.$

$3$

$$million of loans have been approved and funded

$($

only $

$7$

$0$

$0$

$,$

$0$

$0$

$0$

$$more is allowed according to the bank

$$

s lending policy

$)$

$.$

$$ Two loans are presented for underwriting on the last day of the month, loan A and loan B

$.$

$$ The underwriter has the following options:

$1$

$.$

$$Approve both loan A and loan B

$2$

$.$

$$Approve loan A but not loan B

$3$

$.$

$$Approve loan B but not loan A

$4$

$.$

$$Deny both loan A and loan B

$.$

The Bank of the Midwest uses a underwriting

$$

scorecard

$$

$$system that requires the calculation of the various ratios and valuations discussed in this course. Complete the scorecard for each loan INCLUDING COMMENTS. Scores are used to compare loans

$$

$$the higher the score, the greater the chance of approval. Choose your lending strategy

$($

$1$

$,$

$2$

$,$

$3$

$$or

$4$

$)$

$$and comment on your decision in at least

$2$

$-$

$3$

$$paragraphs$.$Loan B Details:

Hanson Dynamics, Inc. is a research company organized as a corporation by a single owner, Henry Hanson. The

company wishes to finance a new office building with a $$500,000$ purchase price. The company is able to make a

$$200,000$ down payment to bring the requested loan to $$300,000.$ The following information was requested and submitted

with the loan application:

BALANCE SHEET

Cash $ $150,000$ Current liabilities $ $225,000$

Accounts receivable $45,000$ Long$-$term liabilities $500,000$

Equipment $600,000$ Common Stock $270,000$

Building $500,000$ Retained earnings $300,000$

Total assets $ $1,295,000$ Total liabilities and equity $ $1,295,000$

INCOME STATEMENT

Net Sales $ $575,000$

Less: Cost of Sales $(274,000)$

Gross Profit $ $301,000$

Less: Operating Expenses $(250,000)$

Net Income $($Operating

Income$)$ $ $51,000$

STATEMENT OF CASH FLOW

Net Income $ $51,000$

Add: Depreciation $74,000$

Change in Current Assets and Liab $(100,000)$

Net Cash Provided by Operating Activities $ $25,000$

Net Cash Provided by Investing Activities $(38,000)$

Net Cash Provided by Financing Activites $(52,000)$

Net Increase $($Decrease$)$ in Cash $ $(65,000)$

The office building is appraised at $$475,000.$ Net operating income has averaged $$40,000$ for the last $5$ years prior. The

annual debt service is estimated to be $$35,000$ per year. Gross income for the property is anticipated to be approximately

$$360,000$ annually, and annual operating expenses are verified to be $$150,000.$ Henry$$s personal financial information

shows that he earns approximately $$18,000$ per month, and currently has the following debts $-$ $$5,000$ in mortgages,

$$1,000$ in car payments, combined credit card minimum payments of $$700,$ and $$3,600$ in other relevant debt. Capital

expenditures for operating activities were $$9\mathrm{.}000$ and dividends were $$8,000.$

Loan B Scorecard

Loan Type:

Metric Calculation

Industry

Standard $($if

applicable$)$

Score $(1-5)$;

$1=$ poor

$2=$ marginal

$3=$ adequate

$4=$ good

$5=$ excellent Comments

Net Worth

Working Capital

Loan$-$to$-$Value

Ratio

Debt Service

Coverage Ratio

Operating Expense

Ratio

Debt Yield Ratio

Debt Ratio

Operating Cash

Flow$/$Net Sales

Free Cash Flow

$($FCF$)$

Comprehensive

Free Cash Flow

$($CFCF$)$

TOTAL SCORE

Loan Approval $($y$/$n$)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Lending Decision $(1,2,3$ or $4)\_\_\_\_\_\_\_\_\_\_$Explanation $(2-3$ paragraphs$)$: