FIN 502 : CHAPTER 12 credit and debt management.docx

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beigefish258

21 Apr 2012

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Looks at what the borrower will have in the future (interest and principle payment) Lender is interested in both the borrower"s short-run and long-run ability to pay interest and principle. Liquidity: ability of a family to meet its debt service payments in the short run. Solvency: the long-run ability of the family to pay its debts. Two important factors that affect your debt capacity are: expected net assets or net worth and expected net cash flow each year. Debt service charge: how likely the cash flow is to fail to provide for all. Matching principle in finance: one should match the expected economic life of an asset to the term of maturity of the financing. Two debt service ratios: debt service ratio (gds ratio) benchmark not over 30% Gds = (annual mortgage payments + property taxes) / gross family income: total debt service ratio (tds ratio) benchmark not over 40%

Related Questions

Explain how the ratios help identify the strengths and weaknesses of the facility and the management team.

The students will use Financial Ratios to analyze a potential strategic acquisition.

The student will use the Financial Ratios to evaluate the current management teamâs ablity to make good long term and short term decisions. Should Acme continue to employ the current management team. If Beechtree is acquired, do we keep its management team or do build a new one

Ratio	Formula	Standard	Beechtree
Current Ratio (Liquidity)	Current Assets/Current Liabilities	1.3	1.15
Quick Ratio (liquidity)	(Current Assets-Supplies on hand)/Current Liabilities	1.2	.9
Days Cash on Hand (liquidity)	(Cash on Hand +Market Securities)/((Tot Operating Exp-Depreciation Exp)/365)	50	35
Days in Net Receivable (liquidity)	(Accounts Receivable +Notes Receivable + Other Receivable-allowance for uncollectable)/(Tot Operating Revenue/365)	49	65
Debt Service Coverage Ratio (solvency)	Net Operating Income/(Principal +interest + lease payment	>1	.89
Operating Margin (profitability)	Operating Income/Total Operating Revenue	>.05	-.005
Return on Total Assets (profitability)	Net Operating Income/Total Assets	1.1	.9

Net Operating Income for this financial statement=Decrease in unrestricted net assets + Interest Expense + Depreciation

scarletpug83

At an interest rate of 10% per year, the economic service life of an asset that has a current market value of $15,000 and the expected cash flows is (show your work). What is the expected cash flow

Year	Salvage Value at End of Year, %	Operating Cost, $
1	10,000	-50,000
2	8,000	-53,000
3	5,000	-60,000
4	0	-68,000

Swaps provide for more complete financial markets and help borrowers tailor their financing at lower interest rates in markets that might not be accessible to them. However swaps present risks.

â¢ If you were the swap bank, discuss the 2 risks that you would consider to be the most important?
â¢ Why is the expected loss from a default on a swap less than the expected loss from the default on a loan with the same principal?

FIN 502 : CHAPTER 12 credit and debt management.docx

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