Problem

Evaluating Debt-Paying AbilityYou are a loan officer with Third Texas Bank. Dan Scott owns...

Evaluating Debt-Paying Ability

You are a loan officer with Third Texas Bank. Dan Scott owns two successful restaurants, each of which has applied to your bank for a $250,000 one-year loan for the purpose of opening a second location. Condensed balance sheets for the two business entities are shown below.

TEXAS STEAK RANCH BALANCE SHEET DECEMBER 31,2011

Assets.

Liabilities&Stockholders’ Equity

Current assets

$ 75,000

 Current liabilities

$ 30,000

Plant and equipment

300,000

Long-term liabilities

200,000

 

Capital stock

100,000

Retained earnings

45,000

Total assets

$375,000

Total liabilities&stockholders’equity

$375,000

THE STOCKYARDS BALANCE SHEET DECEMBER 31,2011

Assets.

Liabilities&Owners’ Equity

Current assets

$ 24,000

 Current liabilities

$ 30,000

Plant and equipment

301,000

Long-term liabilities

200,000

 

 

Capital,Dan Scott

95,000

Total assets

$325,000

Total liabilities&Owners’equity

$325,000

slightly more profitable, but the operating results for the two businesses have been quite similar. You think that either restaurant’s second location should be successful. On the other hand, you know that restaurants are a very “faddish” type of business and that their popularity and profitability can change very quickly.

Dan Scott is one of the wealthiest people in Texas. He made a-fortune—estimated at more than $2 billion—as the founder of Micro Time, a highly successful manufacturer of computer software. Scott now is retired and spends most of his time at Second Life, his 50,000-acrc cattle ranch. Both of his restaurants are run by experienced professional managers.

Instructions

a.             Compute the current ratio and working capital of each business entity.

b.             On the basis of the information provided in this case, which of these businesses do you consider to be the better credit risk? Explain fully.

c.              What simple measure might you insist upon that would make the other business as good a credit risk as the one you identified in part b? Explain.

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