• Motivation Corporation, seeking renewal of its $12 million credit line, reports the data in the following table (in millions of dollars) to Hot Springs National Bank's loan department. Please calculate the firm's cash flow as defined earlier in this chapter. What trends do you observe, and what are their implications for the decision to renew or not renew the firm's line of credit?

20X1 20X2 20X3 20X4 projections for next year
Cost of goods sold $5.1 $5.5 $5,7 $5.8 $6.0
Selling and administrative expenses 8.0 8.0 8.0 8.1 8.2
Sales revenues 7.9 8.5 9.2 9.4 9.8
Depreciation and other noncash 11.2 11.2 11.1 11.0 11.0
expenses
Taxes paid in cash 4.4 4.6 4.9 4.8 4.8

• Identify which of the following loan covenants are affirmative and which are negative covenants:
a. Nige Trading Corporation must pay no dividends to its shareholders above $3 per share without express lender approval.

b. Honey Smith Company pledges to fully insure its production line equipment against loss due to fire, theft, or adverse weather.

c. Soft-Tech Industries cannot take on new debt without notifying its principal lending institution first.

d. Penn Cost Manufacturing must file comprehensive financial statements each month with its principal bank.

e. Dolbe King Company must secure lender approval prior to increasing its stock of fixed assets.

f. Crest win Service Industries must keep a minimum current (liquidity) ratio of 1.5x under the terms of its loan agreement.

g. Dew Dairy Products is considering approaching Selwin Farm Transport Company about a possible merger but must first receive lender approval.

2. As a new credit trainee for Evergreen National Bank, you have been asked to evaluate the financial position of Hamilton Steel Castings, which has asked for renewal of and an increase in its six-month credit line. Hamilton now requests a $7 million credit line, and you must draft your first credit opinion for a senior credit analyst. Unfortunately, Hamilton just changed management, and its financial report for the last six months was not only late but also garbled. As best as you can tell, its sales, assets, operating expenses, and liabilities for the six-month period just concluded display the following patterns:
Millions of dollars January February March April May June
Net sale $48.1 $47.3 $45.2 $43.0 $43.9 $39.7
Cost of goods sold 27.8 28.1 27.4 26.9 27.3 26.6
Selling, administrative, and
other expenses 19.2 18.9 17.6 16.5 16.7 15.3
Depreciation 3.1 3.0 3.0 2.9 3.0 2.8
Interest cost on
borrowed funds 2.0 2.2 2.3 2.3 2.5 2.7
Expected tax obligation 1.3 1.0 0.7 0.9 0.7 0.4
Total assets 24.5 24.3 23.8 23.7 23.2 22.9
Current assets 6.4 6.1 5.5 5.4 5.0 4.8
Net fixed assets 17.2 17.4 17.5 17.6 18.0 18.0
Current liabilities 4.7 5.2 5.6 5.9 5.8 6.4
Total liabilities 15.9 16.1 16.4 16.5 17.1 17.2

Hamilton has a 16-year relationship with the bank and has routinely received and paid of a credit line of $4 million to $5 million. The department's senior analyst tells you to prepare because you will be asked for your opinion of this loan request (though you have been led to believe the loan will be approved anyway, because Hamilton's president serves on Evergreen's board of directors).

What will you recommend if asked? Is there any reason to question the latest data supplied by this customer? If this loan is granted, what do you think the customer will do with the funds?

3. What term in the consumer lending field does each of the following statements describe?
a. Plastic card used to pay for goods and services without borrowing money.

b. Loan to purchase an automobile and pay it off monthly.

c. If you fail to pay the lender seizes your deposit.

d. Numerical rating describing likelihood of loan repayment.

e. Loans extended to low-credit-rated borrowers.

f. Loan based on spread between a home's market value and its mortgage balance.

g. Method for calculating rebate borrower receives from retiring a loan early.

h. Lender requires excessive insurance fees on a new loan.

I. Loan rate lenders must quote under the Truth in Lending Act.

J. Upfront payment required as a condition for getting a home loan.

4. Which federal law or laws apply to each of the situations described below?
a. A loan officer ask an individual requesting a loan about her race.

b. A bill collector called Jim Jones three times yesterday at his work number without first asking permission.

c. Sixton National Bank has developed a special form to tell its customers the finance charges they must pay to secure a loan.

d. Consumer Savings Bank has just received an outstanding rating from federal examines for its efforts to serve all segments of its community.

e. Presage State Bank must disclose once a year the areas in the local community where it has made home mortgage and home improvement loans.

f. Reliance Credit Card Company is contacted by one of its customers in a dispute over the amount of charges the customer made at a local department store.

g. Army Imed, after requesting a copy of her credit report, discovers several errors and demands a correction.