Galahad Inc. (Galahad) is a small manufacturer of customized car parts designed for people who want to
Question:
Galahad Inc. (Galahad) is a small manufacturer of customized car parts designed for people who want to accessorize their cars. Galahad’s products are sold to retailers across Canada and about 20 percent of its sales are outside of Canada, mainly in the United States. The president of Galahad feels that the company has a good product and established markets, and has performed well over the last few years.
However, she is concerned that Galahad is chronically tight on cash. She has approached your organization for a significant loan to provide the company with additional working capital, as well as to purchase capital assets that need to be replaced. The president has provided income statements and balance sheets for recent years.
Additional information:
* The long-term debt is due to be repaid in early 2016. The amount is owed to a large bank and is secured against certain capital assets.
* Galahad has a $130,000 line of credit available from another bank. Bank loans represent the amount borrowed against the line of credit.
¢ All sales to customers and purchases of inventory are made on credit.
* Interest expense is included in selling, general, and administrative expenses.
Interest expense was $26,000 in 2014, $28,000 in 2013, and $10,000 in 2012.
Required:
Prepare a report to the corporate lending department evaluating the liquidity and solvency of Galahad. Provide a preliminary recommendation, with support, on whether the loan should be made. What additional information would you want before reaching a final decision on the loan application? In your analysis consider Galahad’s cash flow.
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