William Sill

AEM 222.1
Case Analysis
14 March 2008

Dynashears

Problem: Due to an economic recession, an overestimated pro forma balance sheet, and
other factors, Dynashears cannot liquidate a million dollar loan back to the bank and is
faced with the problem of obtaining another loan from the bank for the upcoming season
because it must cover its working capital requirements from July to December.
1. Why was Dynashears unable to repay its bank loan by March 31st, 1991, as
originally forecasted?
One of Dynashears main problems is the way they manage their pro forma sheets. On
their pro forma balances and income sheets they over estimated sales, profit, retained
costs, and even inventories. Referring to the charts, the difference in inventories on the
pro forma balance sheet compared to that of actual inventories is huge. At their highest,
in January, Dynashears had excess inventories of 924. This causes their liabilities to go
up because this is not an asset anymore because it cannot be liquidated. The more excess
inventory the more debt. Also, this excess inventory would have been the company’s
liquid assets if pro forma were correct allowing Dynashears to invest or pay off their
loans.
Another justifiable reason Dynashears could not repay its bank loan was the
economic recession they were experiencing. This decline is sales hurt them, and they had
to get another extension on the loan. It is easily noticeable where this recession had
begun. Referring to the chart in the appendix, in December sales were -$426 of what
they were presumed to have been in the pro forma statements. Also there was an excess
inventory of 816. The pro forma statements were consistently off with almost every
estimated calculation. Inventory had a huge impact on them mainly because it turns into
a liability, (debt), and cannot be turned into liquid assets. Just after December, in
January, Mr. Sheehan, treasurer of Dynashears, called Mr. Winthrop, a senior loan officer
at Wellington Bank, to explain to him a recession, along with poor pro forma statements,
was occurring and they would need an extension of the loan. The blame cannot be only
put on Dynashears because the recession caused their sales to plummet.
2. Should Mr. Winthrop extend the Dynashears’ loan, and indeed increase it?
Despite Dynashears’ set back this season period, Mr. Winthrop should look at the
situation as a whole. Dynashears has been a loyal customer always having their loan paid
in full on time. Through current ratio analysis, Dynashears showed adequacy for the loan
(refer to appendix). For example, the month of June in 1990 their current assets were
10,705 and their current liabilities were 983, then the current ratio is found by,
10,705/983 equaling 10.9. This is a larger number in terms of current ratio analysis
meaning that Dynashears a solid amount of liquid assets compared to its debt. This
makes paying a loan back to a bank more promising. As the months go on, it is evident
that the economic recession is taking a toll on their company and hurting sales. They hit
a current ratio low in September at 2.8 which is quite a hit from 10.9. However, another
reason this loan should be distributed is because it is evident from the data that their lack
of sales and profit is largely concerned with the economic recession. Looking at the data,
the recession hits after June of 1990 and started an incline again around October and
November.
Dynashears debt to equity ratio is promising as well. It has shown that
Dynashears’ creditors can rely on them to absorb posses losses form operations,
decreases in asset values, and poor estimates of future funds flow. For example, in June
1990, the debt to equity ratio was, (983+10400)/(10000+10683), equaling .55.
Dynashears shows a solid performance in the acid ratio test. June 1990 through
March 1991 all of the numbers were above one (Refer to appendix). This shows that if
the company were to stop selling it would be able to sell of its outstanding debts with
liquid assets. If Dynashears was to fall below one, then that is when loaning to them
becomes a liability. This is something important for Mr. Winthrop to consider when
giving the loan to Dynashears.
3. Which of the following options is best for Mr. Winthrop
a. Extend and increase the loan;
b. Extend and increase the loan, but ask for security;
c. Refuse the loan
Mr. Winthrop, the senior loan officer needs to make the decision to extend and
increase the loan, but ask for security. Mr. Winthrop has many different aspects to
analyze in determining whether or not to extend or increase the loan. On the positive
side, through the current ratio analysis, Dynashears showed adequacy for the loan (refer
to appendix). Referring to the chart, the current ratio numbers of the company are steadily
increasing as they are heading out of the economic recession; October is at 3.0 and
increases till March reaching 6.0. However, another reason this loan should be
distributed is because it is evident from the data that their lack of sales and profit is
largely concerned with the economic recession. Also in Dynashears defense, their acid
test ratio proved them to be deserving of the loan. This also is what the security of the
loan from the bank refers to. At their lowest, 1.04 in August, Dynashears was still above
one making it easier for Dynashears to liquidate their assets to cash. If something was to
go wrong this proves that the Bank would be able to collect from Dynashears due to the
security established with the loan.
One of the main reasons that Mr. Winthrop needs to ask for security on his loans
is Dynashears lack of responsiveness. Looking at the data, the recession hits after June of
1990 and started an incline again around October and November. Dynashears did
nothing to combat the decline in sales, and continued with high-level production causing
inventory to build up substantially. Referring to the charts, the difference in inventories
on the pro forma balance sheet compared to that of actual inventories is huge. This
created a huge amount of even more debt. Mr. Winthrop also has to analyze how
Dynashears could be so off in estimating the pro forma balance and income sheets. For
the month of November, Dynashears figured they were going have $3380 in sales, and
the actual sales were $2933 making that a difference of -$477. One thing Mr. Winthrop
must do when deciding whether to give the loan or not is to look at Dynashears problem
in prospective to what was going on at the time. The pro forma sheets were Dynashears
fault, but maybe it would not have been so off if it were not for the economic recession.