Finance Case Study Example | Topics and Well Written Essays - 1000 words - 1

Finance - Case Study Example GE’s first criterion of loan application is that the company applying for loan should have minimum three years’ operational working. The CCL has more than three years’ existence starting from 1987 until the year ending December 31, 2002. Thus, CCL clearly passes the first criterion. Second criterion laid down by GE is of paramount importance as it ascertains whether the applicant would have enough cash generation in his or her business to repay the loan. It is necessary to do a complete analysis related to this aspect. Rendl wants to know about the cash generated from the operations so as to be assured of the loan repayment by CCL. This can be given by net earnings after tax plus depreciation charged ($72,795+$79,132 = $151,927). Depreciation is not a cash outgo and remains with the company and hence counted in the cash generated. CCL’s previous loans have been disbursed for the repayment period of 48 months. Assuming same repayment period of 48 months for the loan of 270,000, CCL will have monthly installment of 270,000/48 = $5,625/month. Thus, in a year CCL would need to pay 5625Ãâ€"12 = $67,500 toward its new loan; however, for its two old loans CCL has been already paying 7000+800 = $7800 per month. Thus, the outgo per annum for these two old loans would be $93,600. Added a new loan repayment, total repayment comes out to be $161,100 per year. Cash likely to be generated in the year ended 2003 (as calculated above) at $151,927 is marginally short of this repayment requirements. While Rendl reviewing CCL application for $270,000 on April 15 2003 for likely new loan disbursement from May 1 2003, the CCL would have reduced debt in the first four months by 7800Ãâ€"4= $31,200 and net long term liability at the time of new loan disbursement would be 225,000(from balance sheet year ended 2002) – 31200 + 227000(new debt) = $420,800.