P6-2 Assessing credit risk using cash flow forecasts (LO 6-7) Randall Manufacturing has requested a...
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P6-2 Assessing credit risk using cash flow forecasts (LO 6-7) Randall Manufacturing has requested a $2 million, four-year term loan from Farmers State Bank. It will use the money to expand its warehouse and to upgrade its assembly line. Randall supplied the following cash flow forecasts as part of the loan application $ in thousands Cash provided by operations 2017 2018 2019 2020 685 $715 $720 $735 Cash used for investing activities (2,590) (50) (50) (50) Cash used for financing activities 2,000 (100) (100) 100) Net change in cash $ 95 $565 $570 $585 The forecasts assume that the loan is granted at the beginning of 2017 and that $2.59 million will be spent that year on the expansion and upgrade. Randall plans to spend $50,000 eaclh year to replace worn-out manufacturing equipment and $100,000 each year for dividends. Required: 1. As the bank's chief loan officer, what is your opinion about the degree of credit risk associated with this $2 million loan? 2. How can Randall Manufacturing lower its credit risk
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