Case Solution for Allen Distribution

Group: Matthew Gallagher, Vincent Wang, Jeffery Gui, Joshua Clifford

In order to determine whether or not to extend $1,000 dollars of credit to Morse Photo Company, the pros and cons of the decision will be examined.

First, it can be noted that there is a high profit margin from the photo bulbs sold by Morse Photo Company. Also, Morse guarantees that sales will continue to increase by a significant percentage(18%) in 1968 since they increased by 65% between years 1966 and 1967. Whether or not this personal guarantee will be realized is unknown. If Morse does, in fact, pay us back in a timely manner, our company can guarantee 75% of the sales from credit line used for the Morse’s cost of goods. Also, this line of credit could be the start of a relationship that has potential to earn Allen Distribution Company great profits. All of these factors are the only reasons why the $1,000 should be extended to Morse Photo Company. However, the analysis of Morse Photo Company’s financial position needs to be taken into consideration before granting this loan.

When analyzing Morse Photo Company’s financials it is clear that they have large amounts of outstanding debt. Their current ratio of .57 does not meet Mr. McConnell’s minimum standards of 2.0. In addition, its total equity investment is far less than outstanding debt which is another standard not met. When looking at their earnings Morse Photo’s Company has a .0002% profit margin which means expenses are far too high. These extraordinary expenses may be due to poor management performance. Also, the letters from other Morse Company creditors indicate that Morse Photo has not paid debt in a timely manner which means that have inconsistent cash flows and potential default risk. After reviewing the suggestions from creditors and viewing Morse Photo Company’s great outstanding debt obligations, low liquidity, and marginal profits, this loan should not be granted.