You are the banker to Firm B and notice the following features of the firm’s cash flows. Explain how each of these observations could endanger the bank’s ability to collect its dues from Firm B.
a. The firm has used the money given by your bank for working capital to buy plant and machinery.
b. The firm’s COC and ROA is 15 per cent.
c. ‘Notes to accounts’ shows considerable exposure to currency and interest rate swaps, to hedge the firm’s export activity.
d. ‘Notes to accounts’ shows a large possible write down in asset value, which has not been carried out in the current year.
e. The firm’s contingent liabilities are almost equal to the firm’s balance sheet size.
f. The firm’s operations also show investments in joint ventures and off balance sheet special-purpose vehicles.
g. The firm had taken over a firm in the same line of activity a year ago.
h. The firm has certain long-term contract deals for which revenue is getting booked in the current year.
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