Making a Loan Decision
Assume that you are a loan officer in charge of reviewing loan applications from potential new
clients at a major bank. You are considering an application from Molitor Corporation, which is a
fairly new company with a limited credit history. It has provided a balance sheet for its most
recent fiscal year as follows:
Your bank has established certain guidelines that must be met before it will make a favorable loan recommendation. These include minimum levels for several financial ratios. You are particularly concerned about the bank’s policy that loan applicants must have a total-assets-to-debt ratio of at least 2 to 1 to be acceptable. Your initial analysis of Molitor’s balance sheet indicates that the firm has met the minimum total-assets-to-debt ratio requirement. On reading the notes that accompany the financial statements, however, you discover the following statement: Molitor has engaged in a variety of innovative financial techniques resulting in the acquisition of $200,000 of assets at very favorable rates. The company is obligated to make a series of payments over the next five years to fulfill its commitments in conjunction with these financial instruments. Current GAAP do not require the assets acquired or the related obligations to be reflected on the financial statements.