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\mathrm{.}3$ million of loans have been approved and funded $($only $$700,000$ more is allowed according to the bank$$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 A Details:

Ride$-$in$-$Style, LLC$,$ is a limousine service organized as a partnership by two equal owners, Jim Jones and Rhoda Putnam. They wish to finance two new limousines with a $$470,000$ purchase price. The partners are able to make a $$100,000$ down payment to bring the requested loan to $$370,000.$ The following information was requested and submitted with the loan application:

BALANCE SHEET

Cash $ $8,000$ Current liabilities $ $5,000$

Accounts receivable $1,000$ Long$-$term liabilities $175,000$

Limousines $260,000$ Partner$$s Equity $270,000$

Office Building $205,000$ Retained earnings $24,000$

Total assets $ $474,000$ Total liabilities and equity $ $474,000$

INCOME STATEMENT

Net Sales $ $162,000$

Less: Cost of Sales $(74,000)$

Gross Profit $ $88,000$

Less: Operating Expenses $(91,000)$

Net Loss $($Operating Loss$)$ $ $(3,000)$

STATEMENT OF CASH FLOW

Net Loss $ $(3,000)$

Add: Depreciation $25,000$

Change in Current Assets and Liab $(10,000)$

Net Cash Provided by Operating Activities $$12,000$

Net Cash Provided by Investing Activities $(8,000)$

Net Cash Provided by Financing Activites $(3,000)$

Net Increase $($Decrease$)$ in Cash $ $1,000$

The limousines are appraised at $$500,000.$ Net operating income has averaged $$40,000$ for the last $5$ years prior to this year$$s net loss. The annual debt service is estimated to be $$45,000$ per year. Gross income for the property is anticipated to be approximately $$250,000$ annually, and annual operating expenses are verified to be $$100,000.$ The partner$$s combined personal financial information shows that they earn approximately $$20,000$ per month, and currently have the following debts $-$ $$6,000$ in combined mortgages, $$1,200$ in combined car payments, combined credit card minimum payments of $$900,$ and $$600$ in other relevant debt. Capital expenditures for operating activities were $$2\mathrm{.}000$ and no dividends.

Loan A 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$)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$