The following questions are focused on a specific Lender / Borrower relationship
However, each question is independent so that an incorrect answer does not have a cascading effect on the rest. Use the following information for the questions below.
| LENDER: |
|
|
|
|
|
|
|
|
Lender's maximum Loan To Value (LTV) |
80.00% |
|
|
Lender's rate: |
|
|
8.50% |
|
|
Lender's Term (yrs) |
|
|
7 |
|
|
Debt Coverage Ratio (see below) |
1.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Borrower's Financial Information: |
|
|
|
|
|
Capital Expenditures |
|
|
45,000 |
|
|
Long Term Assets |
|
|
800,000 |
|
|
|
|
|
|
|
|
|
Rev |
|
|
|
600,000 |
|
|
COGS |
|
|
|
150,000 |
|
|
Gross Margin |
|
|
450,000 |
|
|
|
|
|
|
|
|
|
SG&A |
|
|
|
85,000 |
|
|
Depreciation and Amortization |
|
125,000 |
|
|
Int Expense |
|
|
85,000 |
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
155,000 |
|
|
Taxes |
30% |
|
|
46,500 |
|
|
|
|
|
|
|
|
|
Net Income |
|
|
108,500 |
NOTE: "After Tax Cash Flow" (ATCF) can take on different meanings depending on one's perspective.
ATCF here will be further defined in the exercise.
ATCF to owners: the cash available to owners after all obligations are satisfied; includes: payments to all taxing authorities, Debt service (principal and interest), Capital Expenditures.
ATCF Pre-Debt service: the cash available to 'service' any loans or debt after all other obligations; includes: payments to all taxing authorities and Capital Expenditures; but does not include Interest Expense. that is, interest expense is added to ATCF after deductions for tax (i.e., tax benefits of debt); Also, no cash is allowed to be allocated to owners for this analysis.
Debt coverage ratio is the ratio of cash available to pay all debt service divided by the debt service. A coverage ratio of "2" means that if a company generates $10 in ATFC pre-debt service, the lender will credit $5 toward debt service. That is, the lender will require the company to generate 100% more (in total) than what is needed to service the loan.
Question 1 Assume the company's current debt requires a principal payment as provided below (existing loan). What is the ATCF to owners?
Debt Payment required 85,000
Question 2 Assume the company is seeking a new loan. What is the After Tax Cash Flow - pre-debt service (i.e., from the new lender's viewpoint)?
Question 3 Assume the pre-debt After Tax Cash Flow is as follows. ATCF to owners 225,000 What is the amount of cash the new lender will 'credit' or use to evaluate any future loans? (I.e., apply cash coverage ratio)
Debt Coverage Ratio 1.35
Calculated Pre-debt ATCF = ?
Question 4 Assume the amount of cash available for debt service is given below. What is the maximum loan this amount of cash can service?
(That is, assume this cash flow is used to fully amortize the loan.)
Given Pre-Debt ATCF 135,000
Loan Rate 8.50%
Term 7
Loan Amount based on above =?
Question 5 What is the maximum loan amount this lender is going to offer / allow?