American Apparel has been in the news in recent months. Itsboard fired CEO Dov Charney amid several reports of his misdeeds.The company has also lost $270 million over the past three years.Last week, one of American Apparelâs creditors, Lion Capital,called a $10 million loan it had made to American Apparel.(âCallingâ a loan means that the loan has to be repaid immediately;creditors can call a loan when loan terms are violated if there isa call option in the original loan agreement.) An investment firm,Standard General, loaned $25 million to American Apparel to help itavoid bankruptcy for now. American Apparel will repay the $10million it owes to Lion Capital and will still have funds left overfor operating needs.
For additional information about Standard Generalâs loan toAmerican Apparel of $25 million, see Fortune, July 9, 2014,"Standard General gives American Apparel a $25 millionlifeline."
1. Assume that Standard General has made a 10 year loan of $25million to American Apparel. What is the impact on AmericanApparelâs balance sheet (assets, liabilities, and equity) of thisloan?
2. Will this $25 million loan cause American Apparelâs currentratio to increase, decrease or remain the same? Explain.
3. Now assume that American Apparel issued stock to StandardGeneral in exchange for the $25 million. What would have been theimpact on American Apparelâs balance sheet (assets, liabilities,and equity) of this loan? Would this equity transaction haveaffected American Apparelâs current ratio any differently than ifStandard General had made a 10 year loan instead? Explain.
American Apparel has been in the news in recent months. Itsboard fired CEO Dov Charney amid several reports of his misdeeds.The company has also lost $270 million over the past three years.Last week, one of American Apparelâs creditors, Lion Capital,called a $10 million loan it had made to American Apparel.(âCallingâ a loan means that the loan has to be repaid immediately;creditors can call a loan when loan terms are violated if there isa call option in the original loan agreement.) An investment firm,Standard General, loaned $25 million to American Apparel to help itavoid bankruptcy for now. American Apparel will repay the $10million it owes to Lion Capital and will still have funds left overfor operating needs.
For additional information about Standard Generalâs loan toAmerican Apparel of $25 million, see Fortune, July 9, 2014,"Standard General gives American Apparel a $25 millionlifeline."
1. Assume that Standard General has made a 10 year loan of $25million to American Apparel. What is the impact on AmericanApparelâs balance sheet (assets, liabilities, and equity) of thisloan?
2. Will this $25 million loan cause American Apparelâs currentratio to increase, decrease or remain the same? Explain.
3. Now assume that American Apparel issued stock to StandardGeneral in exchange for the $25 million. What would have been theimpact on American Apparelâs balance sheet (assets, liabilities,and equity) of this loan? Would this equity transaction haveaffected American Apparelâs current ratio any differently than ifStandard General had made a 10 year loan instead? Explain.
