Purchase Solution

# Evaluate: applied for loans: Morris Co. and Walker Co.

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John Marshall is employed as a bank loan officer for CityBank. He is comparing two companies that have applied for loans and he wants your help in evaluating those companies.
The two companies - Morris Company and Walker Company - are approximately the same size and had approximately the same cash balance at the beginning of 2009.
Because the total cash flows for the three-year period are virtually the same, John is inclined to evaluate the two companies as equal in terms of their desirability as loan candidates.
Abbreviated information (in thousands of dollars) from Morris Company and Walker Company is shown below:

Morris Company Walker Company
Cash flows from: 2009 2010 2011 2009 2010 2011
Operating activities: \$10 13 15 8 3 -2
Investing activities: \$(5.00) \$(8.00) \$(10.00) \$(7.00) \$(5.00) \$8.00
Financing activities: \$8.00 \$(3.00) \$1.00 \$12.00 \$4.00 \$-
Net from all activities: \$13 \$2.00 \$6.00 \$13.00 \$2.00 \$6.00

Instructions:

1. Do you agree with John's preliminary assessment that the two companies are approximately equal in terms of their strength as loan candidates? Why or why not?
2. What might account for the fact that Walker Company's cash flow from financing activities is zero in 2011?
3. Generally, what would you advise John with regard to using statements of cash flows in evaluating loan candidates?

##### Solution Summary

Your response is 190 words and explains that Morris is much stronger than Walker even with the same cumulative cash flows. Non-recurring and recurring sources of cash are discussed.

##### Solution Preview

Your response is 190 words and explains that Morris is much stronger than Walker even with the same cumulative cash flows. Non-recurring and recurring sources of cash are discussed.

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1. I do not agree with the preliminary assessment of these two as comparable. Cash from operating is a stronger signal ...

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