Limited leverage and business
A majority of small business are discouraged from having high leverage ratios. In this case, Frank having a small proprietary, is unaware of the benefit that the business might be having with leverages. Subsequently, his fears are based credit being expensive. According to McCabe and Yook (2011), with the cost of finance fixed, the increased revenues attributed to these credit finance, offers cushion on writing off the loan because it will generate more earnings. However, it is only when well managed that credit will be of advantage to the company or business. In excess, the liability increases the third party claim into the business; therefore, limited the performance of assets and capital for the business (Disney, Warburton and Zhong, 2013). The higher leverage index in a business is indicative of reduced cash flows at the end of the financial periods and the reducing profitability of the business. In this case, Frank’s business is yet to experience any alarming leverage levels for the business operations; therefore, the use of credit/loan finance cannot be ruled out as harmful to the future operations of the business.
Ethical Consideration to Stephanie’s Mom
Ethical consideration needs to be understood by Stephanie’s mom from the professional point of view. To understand her perspective, she focuses on the goodwill that she expects their client to have for them. Moreover, with the position of Hosea Garcia as a manager with the bank and a friend to the family, the concerns that seem to infringe on ethical professional conduct in business are established personal relations between the two families. Stephanie cites the recent occurrence of the 2008 lending crisis that has made the banks get even tighter regulation on borrowers. This defines that Stephanie’s mom needs to build her understanding on the collusion of interest, keeping in mind that the family business has no credit history trying to seek assistance from Hosea might amount to collusion bringing the role of the banks manager to light as wanting and suspicious (Crossan, Mazutis and Seijts, 2013).
Under loan application, Frank will need to present his financial statements over the period from which the business have been operational, if they are to qualify for any credit. This is established with the performance of the business as an alternative to the lack of credit history that the business lacks. In fact, calling the bank manager will amount to automatic disqualification of the loan application process, making things worse for Frank, and should, therefore, be avoided.
Profitability of the Truck Investment
Considering that the truck is not bought with the interest of reselling it, the discounted cash flows suggest that the investment in the truck is worth trying. This is separate from the withheld information on the current expenses that Frank has been incurring on the old truck. Suggestively, the old truck has lower fuel efficiency; thus, making it less lucrative to continue repairing because it constantly breaks down.
Reading from the internal rate of return that the invested truck will have provided in the 8 years, the project returns of 15.99%, making the overall profitability stand at 65.71% are enough to consider the application for a loan. This IRR and the profitability ratio suggest of an effective spread on the performance of the asset financed by loan (Disney, Warburton and Zhong, 2013). Notably, the cost of finance stands at $ 3,000 based on the 12% fixed cost of capital that the banks might offer. Looking at the intrinsic value of money as presented by the cash flows, the performance of the loan compared to the cash flows seems to put the business on the receiving end. This is suggested by the more than 10-year payback periods, which falls away from the 8-year useful life of the asset; therefore, presenting it as irrelevant to incur the cost of finance. Nevertheless, looking at the MARCS depreciation methods, the analysis agrees to the fact that the method of depreciation is common with highly valued projects compared to the truck, which is more a convenience investment than it is for the business. The truck generates no income other than depending on the plumbing income from the business. This dismisses the alienation of the IRR and that of the profitability to the effect of depreciations. According to McCabe and Yook (2011), the real value of the net cash flows might have been higher than recorded.
Examining Benefits for Frank to Close His Business
Closing the business was a proposition floated based on the needs that frank has in buying a truck. This suggests that the truck must have been sought for more personal reasons that commercial. Considering that if Frank was to close his business and seek employment, he would have to save for the vehicle before having it. This is compared to the available options of having the truck purchased through asset finance, in this case, he gets to own the truck before fully paying for it. The suggestive benefits that he would get after closing business are not in any way over-weigh those of him continuing to operate the business. The closure of business as stated does not suggest the real value, which he might even be able to sell his business, having been a sole proprietor. In addition, with the lack of an asset or capital base for the business, the closure of the business, in this case, is seen as an opportunity for Frank to get a steady income, but not, in any case, provide for the purchase of the truck that will now have no commercial use.
Recommendations for the Situation
Developing from the use of the cash flow methods in assessing the net present value of the truck, the assumption on the real value in evaluation have provided good IRR and profitability ratios. Therefore, based on the interest that the asset has in this case after 8 years, the truck can still be sold and the purchase of another one guaranteed this time without having to seek finance. The analysis presents that the valuation of the project is in order and, therefore, recommends that Frank needs to apply for the loan in this case. This will however, need to be considered under the consideration of ethics based on the need to keep their personal relationships with the bank’s manager away from the professional conduct of business (Cohen et al., 2012). Progressively, Frank should take the initiative of asking for a loan from the bank on his own capacity rather than have his wife do it her way.
References
Cohen, J., Ding, Y., Lesage, C., & Stolowy, H. (2012). Corporate fraud and managers’ behavior: Evidence from the press. Entrepreneurship, Governance and Ethics, 1(1), 271-315.
Crossan, M., Mazutis, D., & Seijts, G. (2013). In search of virtue: The role of virtues, values and character strengths in ethical decision making. Journal of Business Ethics, 113(4), 567-581.
Disney, S. M., Warburton, R. D., & Zhong, Q. C. (2013). Net present value analysis of the economic production quantity. IMA Journal of Management Mathematics, 24(4), 423-435.
McCabe, G. M., & Yook, K. C. (2011). Jensen, Myers-Majluf, free cash flow and the returns to bidders. The Quarterly Review of Economics and Finance, 37(3), 697-707.
