Case Study : Resort Co.

• What impact should the potential foreclosure and extinguishment of debt have on the cash flows used to perform the recoverability test?

Be Our Guest’s balance sheet shows good signs of liquidity. Current Ratios for the past four years have remained above 1 proving that the company can handle its current liabilities. The current ratios are not extremely high (19941.27, 1995- 2.17, 1996- 1.15 and 1997- 1.16), but they can cover the current liabilities. It is important to note that the company is operating on a thin line because the current assets are barely covering the current liabilities. This is particularly unpleasant because we are dealing with a company operating in a seasonal business. It is a concern that the current ratio slightly eroded after 1995, and this is primarily due to Be Our Guest converting the bank line into long term debt in

Debt to Equity Ratio of 1.23 more than 1 reveals that more than half of assets are financed by debt.

9. What is the Cost of Debt, before and after taxes? Using the interest rate for the largest debt…cannot use the weighted interest rate for the debt since it includes capital lease obligations with no stated rate and could not find in the notes to the financials. 5.4% After tax cost is .054 x (1-.36) = 3.5%

HH’s long term debt/asset ratio was decreasing from 2006 to 2010 and goes up a little bit to 14.82% as shown on the data. However, the total debt ratio were all time above 50% except year 2010. At the end of 2011, HH’s total debt ratio is 57.54% while the long term debt/asset ratio is 14.82%. This tells us that HH has a larger portion in short term debts/ liabilities than long term debts. And as we can see from the consolidated balance sheet,

The decline of inventory turnover presents the incresed possibility of inventory obsolescence which is likely to be assessed as higher business risk. In debts to equity part, the ratio in current year is much higher than that of preceeding year, which means the extent of use of debt in financing company is much higher than before. Pinnacle has used most of its borrowing capacity and has little cushion for addional debt.This action brought high business risk to Pinnacle. In addition, Pinnacle puchase more inventory in current year that that of preceeding year, and net sales are increasing also compared previous year. However, the net income is decreased significantly. These changes show expenses (maybe direct or indirect) have increased dramaticly. The company uses more expensive materials and labors to manufacure and sell products.

Creditors normally focus on the liquidity or solvency of the borrower in terms of current ratio and quick ratio, which indicate whether the company has enough working capital to cover the short-term debts. Myer will enter into a syndicated facility agreement to refinance the existing borrowings of the Myer Group. Besides, creditors are interested in the business risks the company might undertake, which indicate the possibility that the company might be unable to pay back the long-term liability in the future. From this point, the expectation on high return on investment and high profitability in the long run make the creditor’s interest aligned with shareholders’ value.

b. Other indications of financial difficulties (default on loan or similar agreements, arrearages in dividends, denial of usual trade credit from suppliers, restructuring of debt, noncompliance with statutory capital requirements, the need to seek new sources or methods of financing, or the need to dispose of substantial assets).

2. Forecast the firm’s financial statements for 2002 and 2003. What will be the external financing requirements of the firm in those years? Can the firm repay its loan within a reasonable period? In order to forecast the financial statements of 2002 and 2003, the following assumptions need to be made. The growth of sales is 15%, same as 2001, which is estimated by managers. The rate of production costs and expenses per sales is constant to 50%. Administration and selling expenses is the average of last 4 years. The depreciation is $7.8 million per year, which is calculated by $54.6 million divided by 7 years. Tax rate is 24.5%, which is provided. The dividend is $2 million per year only when the company makes profits. Therefore, we assume that there will be no dividend in 2003. Gross PPE will be $27.3 million (54.6/2) per year. We also assume there is no more long term debt, because any funds need in the case are short term debt, it keeps at $18.2 million. According to the forecast, Star River needs external financing approximately $94 million and $107 million in 2002 and 2003, respectively. In order to analysis if the company can repay the debt, we need to know the interest coverage ratio, current ratio and D/E ratio. The interest coverage ratios through the forecast were 1.23 and 0.87 respectively, which is the danger signal to the managers, because in 2003, the profits even not

Joe’s Fly-By-Night Oil’s capital structure for Dec 31, 2016, is 52% Accounts Payable following by 39% Retained Earnings. The value of their long-term debt is 9%. The Accounts Payable of 52% is not good because the value is greater than the retained earnings. If Joe’s Fly-By-Night Oil’s wants to expand their business and services they would need to reduce the value of the Accounts Payable and increased the value of the Retained

• Coleco is dependent on debt through years (also successful ones) • The company has a huge amount of total liabilities (in 1987 about $ 620 mln) • No resources to pay debts (Negative equity, Assets are generally composed of Accounts receivables) • Company by the moment already does not comply with the creditors requirements

To find who is bearing the risks of receivables ownership, an analyst should carefully examine the details of the securitization or factoring transactions. Moreover, if the transactions are considered borrowed where the lender does not directly bear the risk of owning the receivable/security, then the ownership risks should be retained by the company. Essentially, companies who are facing different economic realities may choose similar accounting treatment being that it will satisfy the requirement under GAAP

The desired outcome of its debt restructuring and recapitalization was to continue to receive credit from companies. After negotiations with its bankers, Harnischfeger was able to convince them to restructure its debt obligations into three year terms.

In January 1980, the management of the Marriott Corporation found itself in an interesting dilemma: not only did the corporation have considerable excess debt capacity, but projections of future operations and cash flows indicated that this capacity was on the rise. For Marriott, excess debt capacity was viewed as comparable to unused plant capacity because the existing equity base could support additional productive assets. Management was therefore faced with two problems. First, it needed to determine the amount of funds that would be available if Marriott's full debt capacity were utilized. Second, management needed to decide whether to invest excess funds in new or existing businesses, or to return them to the companies shareholders

company had experienced a shortage of cash and had found it necessary to increase its borrowing