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Discussion on the Approval of Revolving Credit

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Write 10-15 sentences on this scenario:

If you were a lending officer at Bank of America and were asked to approve a $100,000,000 unsecured revolving credit facility for Ford that would (i) bear interest at 7% per year and (ii) require a 30-day clean-up period each year, based solely on the information contained in the attached PDF, would you approve it? The facility would have an initial term of three years. Revolving credit facility: like a credit card, it has a limit and an interest rate, and the borrower can draw down (up to the limit) on the facility and pay the facility down or of as often as it wishes. Interest accrues on the outstanding balance from time to time. Thirty Day clean-up period - during each calendar year, there needs to be a 30-day period during which the outstanding balance on the facility is zero.

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The answer to this problem shows the assessment of Ford Company for unsecured credit. The references related to the answer are also included.

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If I were a lending officer at Bank of America and was asked to approve a $100 million unsecured revolving credit facility for Ford bearing an interest rate of 7% per year and requiring a 30 day clean up period each year, I will not approve the revolving credit. The current debt of Ford (2012) is $105 billion. This has increased from $99 billion in 2011. Whereas, the total equity of Ford is $16 billion; This means that the debt equity ratio is 6.6. The company is over-leveraged. Also, the net cash provided by ...

Solution provided by:
Hatim Baxamusa, MBA
Education
  • BSc , University of Calcutta
  • MBA, Eastern Institute for Integrated Learning in Management
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