Question

North/South, LLC has a shopping center with 15 local tenants generating gross revenues of $510,000; operating expenses of $218,000; and interest expense of $191,750. There is a $2,950,000 loan amortizing on a 25-year basis at a rate of 6.5 percent, and the bank's target DSC is 1.20. Which of the following best describes the cash flow cushion in this scenario? Very well cushioned Moderately nel cushioned Slightly lacking adequate cushion X Severely lading adequate cushion

Answer 1

Answer:

Correct answer is:

Slightly lacking adequate cushion

Explanation:

Debt service requirement:

Annual mortgage payment = PMT (rate, nper, pv, fv, type) = PMT (6.5%, 25, -2950000, 0, 0) = $241,845.37

EBIT = Revenue - Operating expense = 510000 - 218000 = $292,000

DSC (Debt service coverage) =292000 / 241845.37 = 1.207

Bank's Target DSC = 1.20

As we observe with the projected EBIT, it just meets the target DSC and there is hardly any cash flow cushion to take care any potential decrease in revenue or increase in operating costs.

Hence:

As the projected DSC barely meets the bank's required DSC, we cannot say cash flow cushion is 'very well cushioned" or "Moderately well cushioned"

In terms of cash flow cushion, the appropriate description will be "Slightly lacking adequate cushion"