المحاسب الإداري المعتمد الجزء 2 B. Corporate Finance

Tessaline: Financing a Hospital Buffer Stock

Tessaline Medical Distribution

Question of 6 Tessaline: Financing a Hospital Buffer Stock

Tessaline: Financing a Hospital Buffer Stock Case-based question

الحالة

Tessaline Medical Distribution supplies sterile surgical consumables to hospitals. It has just signed a ten-year exclusive supply agreement with a regional hospital network. Under the agreement, any hospital in the network must be restocked within four hours, so Tessaline must hold a dedicated buffer stock in a new warehouse near the network for the full ten years. Items taken from the stock are replaced continuously, so the required stock level does not run down during the agreement.

The project needs $14,000,000: $5,600,000 for automated storage-and-retrieval equipment and $8,400,000 for the initial buffer stock. Immediately before the financing, Tessaline reports current assets of $31,500,000 and current liabilities of $21,000,000. It has no surplus cash, so any deposit a lender requires must come out of the borrowed funds.

The treasurer has two financing offers, which are also summarized in the financing terms table.

Option A, from Tessaline's relationship bank, is a one-year note that the bank may renew each year at its discretion. The rate is 6.0% for the first year and is reset to the bank's current lending rate at each renewal. Interest is paid annually at the end of each year. The bank requires a non-interest-bearing demand deposit equal to 20% of the note's face amount. The deposit carries no legal restriction on withdrawal, and Tessaline reports it within cash and cash equivalents.

Option B is an eight-year term loan placed privately with a pension fund, at a fixed annual rate of 7.2%. Principal is repaid in 32 equal quarterly installments, and interest on the balance outstanding is paid on the same quarter-end dates, starting three months after the drawdown. There is no deposit requirement, but Tessaline must keep its current ratio at 1.40 or higher at every quarter-end.

الافتراضات

Tessaline draws the loan and pays for the equipment and the initial buffer stock on the same day. Unless a question says otherwise, balance-sheet effects are measured immediately after those purchases.
Under Option A, Tessaline borrows exactly the face amount that leaves $14,000,000 available to spend after the required deposit.
No agreement commits the bank to renew or refinance the Option A note, so the entire note is a current liability. Under Option B, principal due within 12 months is reported as current maturities of long-term debt and the remainder is noncurrent.
The equipment is a noncurrent asset and the buffer stock is inventory, a current asset. Ignore income taxes, issue costs and interest accrued on the drawdown date.
Option B's quarterly interest equals 7.2% / 4 = 1.8% of the principal outstanding at the start of each quarter.

مواد مرجعية

Financing terms

Term	Option A: bank note	Option B: pension-fund term loan
Maturity	One year; renewable annually at the bank's discretion	Eight years
Interest rate	6.0% for year 1; reset to the bank's lending rate at each renewal	7.2% a year, fixed
Interest payments	Annually, at the end of each year	Quarterly: 1.8% of the principal outstanding at the start of the quarter
Principal repayment	Full face amount at maturity unless renewed	32 equal quarterly installments, the first three months after drawdown
Deposit requirement	20% of the note's face amount; non-interest-bearing, no legal restriction on withdrawal, reported in cash	None
Covenant	None stated	Current ratio of at least 1.40 at every quarter-end

Summary of the two offers described in the case.

If Tessaline chooses Option B, what is the effect on its net working capital immediately after the equipment and the initial buffer stock have been paid for?

الإجابة An increase of $12,250,000 No change An increase of $6,650,000 An increase of $8,400,000 A decrease of $5,600,000

Select the THREE statements that describe genuine advantages of Option B over Option A for financing Tessaline's ten-year buffer-stock commitment.

اختيار 3 إجابات. المحدد 0 / 3

الإجابة If market lending rates fall, Option B's rate is reset downward at the next quarterly payment date. Option B requires Tessaline to borrow only $14,000,000, compared with $17,500,000 under Option A, because no deposit has to be left with the lender. Option B leaves net working capital $14,000,000 higher than Option A does, because none of the term loan's principal is reported in current liabilities. The fixed 7.2% rate cannot be reset upward during the eight years, which removes repricing uncertainty on this borrowing. Because principal is spread over 32 installments, Option B's first-year debt service is smaller than Option A's would be if the bank renews the note. The funding is committed for eight years, so during that term Tessaline does not depend on a lender's yearly decision to renew it.

Compare the two options immediately after the equipment and the initial buffer stock have been paid for. Select the THREE correct statements. Ratios are rounded to two decimal places.

اختيار 3 إجابات. المحدد 0 / 3

الإجابة Option A leaves net working capital $5,600,000 lower than before the financing, because it adds $17,500,000 to current liabilities but only $11,900,000 to current assets. The deposit requirement is what makes Option A reduce net working capital; without the deposit, net working capital would not fall. Under Option A, the $3,500,000 deposit is excluded from current assets because the bank requires Tessaline to keep it. Under Option B, if current liabilities stay at their level immediately after the drawdown, current assets could fall by up to $8,050,000 and the current ratio would still meet the 1.40 minimum. Under Option A, the current ratio falls from 1.50 to 1.13. Under Option B, current liabilities are still $21,000,000 at this point, because the first installment is not due until three months after the drawdown.

Under Option B, how much interest will Tessaline pay in total for the first year of the loan (the first four quarterly interest payments)? Enter a positive amount in whole US dollars; no rounding is necessary.

الإجابة USD

رقم صحيح.

The buffer stock is a Nature of the buffer-stock investment investment in current assets. The maturity-matching approach therefore favors financing it with Financing that matches the need . Option B's quarterly principal installments are expected to be paid from Expected source of scheduled repayments . Option A's annual rate reset would work in Tessaline's favor only if market lending rates Rate movement that makes annual resets favorable before a renewal.

For each feature, select the financing offer or offers to which it applies. The lender can choose not to continue the funding once twelve months have passed, even if every loan term has been met: Lender may stop funding after twelve months . The interest rate for every year Tessaline expects to use this financing, including any renewals, is known at inception: Rate known at inception for every year of expected use . Part of the amount borrowed must remain on deposit with the lender: Deposit kept with the lender . At least part of the principal is reported as a current liability immediately after the drawdown: Some or all principal current after drawdown . The principal balance falls every quarter under the loan's schedule: Quarterly principal reduction . Tessaline must keep its current ratio at or above a stated minimum: Minimum current-ratio covenant .

تظهر الدرجات والإجابات الصحيحة والشروح فور تسليم الإجابات. ولا يحصل السؤال غير المُجاب على أي درجة.

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