Submitted by: Submitted by aaghekian
Views: 1071
Words: 496
Pages: 2
Category: Business and Industry
Date Submitted: 04/22/2011 12:33 PM
The case “US Bank of Washington” discusses the dilemma of providing a new loan to Redhook Ale Brewery that has decided to expand and has chosen US Bank of Washington as one of the sources of finance. Redhook Ale Brewery has developed a good relationship with the mentioned commercial bank and currently expects 6.5 million of financing.
The problem in the case consists in the choice to finance a deal that seems risky to Mal Harding, Vice President of US Bank of Washington. Despite the reputation of the company, its large market share, increasing sales, etc., Harding is not sure Redhook Ale Brewery will meet the financial projections presented in the new loan application.
Another problem is the banking industry itself. In 1989 the profit indices in the whole industry were weak, mainly because of losses in the C&I loans and, thus, the situations has become more complicated since the Bank has to decide whether the investment will be a good one or not given the situation.
The risk that Harding associates with the deal under discussion is related to the fact Redhook Ale Brewery is planning to enter a new market, particularly market for lager beer, and Harding and the Bank as whole are reluctant to undertake high-risk projects despite the fact that they do value long-term relationships with the customers and especially with a loyal customer like Redhook Ale Brewery.
Another factor that needs attention is the source of payment that Redhook Ale Brewery provides in the new loan application. The payment of the loan is projected to be made by means of future profits and cash flows. It is apparent that any projections, even the best ones are just projections and the risk is obviously high.
Having identified the main problems of the case, the following needs to be taken into consideration while deciding on the new loan provision:
First of all Redhook Ale Brewery is successfully conducting its business, and it is hardly probable that the company will go bankrupt...