Mid module review 1 rising sun company is a

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MID-MODULE REVIEW 1 Rising Sun Company is a successful importer of traditional Japanese food. The company is pri- vately held and has operated since 1982.Revenues and net income for the most recent fiscal year were $82 million and $9 million, respectively. Currently located in San Francisco, the company is considering expansion into the Seattle area. Management has prepared a business plan and esti- mates that the company needs $15 million to complete the plan, including $6 million to purchase land and construct a storage facility; $2 million for office equipment and leasehold improvements for rented office space; $5 million for inventory purchases; and $2 million to pay permitfees, rent, wages, and other operating expenses in the first few months until revenues are realized. Required What sources of financing should Rising Sun Company consider? Discuss each source. The solution is on page 4-45. CREDIT RISK ANALYSIS PROCESS The overarching purpose of credit risk analysis is to quantify potential credit losses so that lending decisions are made with full information. Expected credit losses are the product of two factors, the chance of default and the size of the loss given default. This is algebraically reflected as follows:
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Expected credit loss = Chance of default x Loss given default Module 4 I Credit Risk Analysis and Interpretation 4-8 - ore we discuss how lenders assess these two factors, consider that the number and types of ies who perform credit risk analysis is broad and varied: trade creditors, banks and nonbank cial institutions, debt investors (including participants in public debt markets), and credit . g agencies. The key distinction among the groups is the nature of the information they use in ir analysis. That is, not all lenders have access to the same information and, thus, each group rs its approach to credit analysis. Trade creditors acquire additional information via credit applications. Given its size and repu- . n, Home Depot has little difficulty attracting trade credit, and information is publicly avail- to potential and existing creditors. But for private companies, the credit application might be only information available to a potential lender. Trade creditors check applicants' references, uding trade references (names of other trade creditors, their respective credit limits, outstand- ~ balances, and any nonpayment information) and bank references (names of bankers and the unts of any lines of credit). Because trade creditors often extend credit to many customers in same industry, the chance of default can be highly correlated among customers. Thus trade 'tors closely monitor information on industry trends and outlook. Banks and nonbank financial institutions have access to information that managers do not e to the public. Moreover, bankers typically negotiate the loan and adjust loan terms to fit hance of default for each client. As well, banks can monitor bank balances and act on early . g signs. Thus, private lenders are in a unique position to refine their credit analysis.
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