Dynashears Case Study

October 18, 2011

Problem: Mitch Winthrop of Wellington National Bank must make a decision regarding
Dynashears, Inc.’s request to take out loans based on the company’s past financial data.
Mr. Winthrop must also take into account the economy in recession and the frequent calls
from Dynashears’ treasurer Dan Sheehan conveying unfortunate updates.

Alternative 1: Mr. Winthrop can consider the option of refusing the loan to Dynashears,
Inc. By doing this, Wellington National Bank does not have to take the risk of losing
money when lending to Dynashears. According to the company’s income statement, sales
are steadily declining. Mr. Sheehan’s periodic calls to Mr. Winthrop also further validate
the current and possibly increasing difficulties that Dynashears faces, leading to some
suspicion and doubt of Dynashears’ ability to afford the loan. The bank also saves time,
money, and resources that would have spent and allocated on the company. Moreover,
the funds that could have been allotted to Dynashears can be applied to another company
in better financial standing. However, if Dynashears manages to make profits, then the
bank would be missing out on a valuable opportunity. The relations between Dynashears,
Inc. and Wellington National Bank would also be soured, resulting in an unfortunate loss
for the bank especially if Dynashears proved extremely lucrative. Consequently,
companies that interact or have relations with Dynashears may be discouraged from
contacting Mr. Winthrop and his bank for loans due to its refusal to lend to Dynashears.

Alternative 2: Mr. Winthrop may also pursue the alternative of approving the loan
without securities. Wellington National Bank would be receiving higher interest rates
from Dynashears than if the bank offered a loan with securities. Relations between the
bank and Dynashears would bloom since the company would be grateful for the bank’s
steadfast belief in its ability to bounce back from its financial troubles. Affiliates of
Dynashears would also be more likely to conduct business with Wellington National
Bank as well. On the other hand, disadvantages of loaning without securities include
higher risks of the bank losing assets. Additionally, if Dynashears declared bankruptcy,
the bank would not have first claim on the company’s inventory of property and
equipment. The gains that the bank makes on charging a higher interest could also
possibly be outweighed by the losses from debt and Dynashears’ inability to repay the
bank, resulting in a net loss. This situation proves more likely as one observes the
negative data for March 1991. Dynashears did not make a profit before taxes, leading to a
decrease in dividends for stockholders and a severe drop in retained earnings from plus
$7,000 to losing $24,000.

Alternative 3: Wellington National Bank has a third alternative in which it can loan
Dynashears, Inc. with securities. Advantages of this decision include receiving collateral
from the company for the loan. Furthermore, if Dynashears is hit by bankruptcy, the bank
would the first to claim its assets. Therefore, any qualms that the bank has about loaning
to Dynashears can be expelled by the securities that allow the bank to be reimbursed if
the company fails. A bank may still be hesitant to agree to the loan, but the past success
hat Dynashears has experienced indicate that its management and practices are credible.
The company could resume its initial track and produce great balance sheet and income
statement numbers like it once did. However, when lending with securities, the interest
rate is lower then lending without securities. Thus, the bank is receiving fewer direct
returns with each dollar of loan. The unfortunate situation in which the collateral given to
the bank and the acquired assets after bankruptcy do not amount to the value of the loan
also arises. Similarly to previously described instances, the relationship between the bank
and the company may result with some strains as Dynashears is more confident in its
ability to secure eventual payment for the loans than Wellington National Bank is.

Recommendation: It would be in Mr. Winthrop and Wellington National Bank’s best

interests to follow through with Alternative 3 and offer Dynashears the loan with
securities. Although the periodic phone calls from Mr. Sheehan may discourage Mr.
Winthrop, the numbers do not lie. An examination of Dynashears, Inc.’s financial reports
from June of 1990 to March of 1991 indicate a stable and trustworthy company for the
most part.
The current ratio, which measures the ratio of current assets to current liabilities is
a standard evaluator of a company’s financial health and for which the industry gauge
accepts anything greater than 2.0, was at a high in June 1990 at 10.8. As the problems
arose, the ratio fell to a low of 2.76 in September 1990 but rebound to a second high of
5.99 in March 1991. The acid ratio that relates the amount of current assets without
inventory to current liabilities is also printed at healthy numbers and never falling below
1.0.
Furthermore, the calculations of accounts receivable turnover and account payable
turnover, which illustrate the number of days that it will take for the company to receive
its payments and the number of days that it will take the company to pay its liabilities,
respectively, show that Dynashears is in good enough financial standing to pay its debts
in between one hundred to two hundred days. Relative to the number of days that others
will pay Dynashears, anywhere from 494 to 810 days, the accounts payable turnover rate
indicates that the others who owe Dynashears may be worse off in the slumping
economy.
However, the numbers can prove discomforting when the return on sales, profits,
and retained earnings are preceded by negative signs. All of the previous reasoning
explains why the bank should proceed with the loan, but the areas in which there was
noticeable decline in success bolster the decision to loan with securities. The return on
sales experienced a high of 16.88 thousands of dollars in the past year, but in the last
month recorded lost a greater amount of 21.79 thousand. Furthermore, retained earnings
declined at a hefty sum of 260 thousand dollars, losing the retained earnings that had
accumulated over the past four months. Nevertheless, at least the company sacrificed part
of its own retained earnings to pay its stockholder dividends on schedule despite the loss
in net income.
Clearly, the past history of Dynashears indicates that it has the ability to succeed.
With the help of Wellington National Bank and perhaps a better economic scene, there is
definitely potential for Dynashears to reestablish itself.