U.S Bank of Washington and Redhook Ale Brewery

Kristaps Staks

Edwin Godinez

Dilemma: The U.S. Bank of Washington will need to determine if making a loan to Redhook Ale Brewery fits the bank’s portfolio.

Alternatives:

1) Provide loan for Redhook Ale Brewery using a floating rate based on the U.S. Bank of Washington Prime

2) Provide loan for Redhook Ale Brewery with loan covenants

3) Reject loan request from Redhook Ale Brewery and keep current loan portfolio

4) Reject loan request from Redhook Ale Brewery and shift focus from commercial lending to residential lending

Criteria:

1) Improves revenues and cash flow stream of U.S. Bank of Washington

2) Fits within U.S. Bank Corps overall stated goals of 1% Return on Assets (ROA) and +15% Return on Equity (ROE)

3) Reduces risk of outstanding/existing (in terms of loan sector concentration) loan portfolio

Analysis:

1) Through the analysis of cash flows, it can be seen the total net cash flows as volatile. Based on estimates made, the cash flows remain positive for certain years and negative for others as seen in Exhibit 1. The risk profile that the bank wishes to maintain will not fall in line with the cash flows that Redhook Ale Brewery will provide. The significant projected negative cash flows from investing activities are a risky part of the company. With a loan at just the floating rate, the risks of the company will dilute the quality of the loan portfolio.

2) The net operating cash flow of Redhook Ale Brewery is projected to be on a significant increase. Should the terms of the loan structure limit the amount of investments that Redhook Ale Brewery can make, it will greatly reduce the risk. If the projected net operating cash flows prove to be accurate, the company is operating very efficiently. The risks of the bank’s loan portfolio will be reduced through making a loan with strong positive cash flows. The loan terms with covenants will provide the U.S. Bank Corp overall additions to their return on assets and return on equity.

3) With a...