LDP 6.1 Assessing Short-Term Repayment Ability Using Monthly Pro Formas

Question 1

Cash budgets, projected income statements, and pro forma monthly balance sheets are useful
because:

Answer 1

1) Enables you to estimate not only short-term borrowing needs and repayment sources (from the cash budget), but also profitability and financial condition (from the projected income statements and pro forma balance sheets)
2) Estimate the soundness of a seasonal or other short-term loan by measuring leverage and coverage ratios at the peak borrowing period.
3) Estimate secondary repayment sources by evaluating collateral coverage at the peak borrowing period.

Question 2

Riskiest periods

Answer 2

When substantial borrowings are combined with high inventory, and when receivables cover a relatively small portion of the loan.

Question 3

Projections - Adjustments to Long-term Debt

Answer 3

• Increase long-term debt by the amount of any new debt to be added net of the amount coming due each month
• Decrease long-term debt by the amount of any required principal payments paid during the year

Question 4

Projections - Adjustments to Current Maturities

Answer 4

Adjust only if:

1) New long-term debt is to be advanced
2) The loan will be repaid in full during the 12 months following each pro forma month
3) There will be a change in payment terms