FIN 4970 RC Mod 1 Consequences of Overlooking Critical Financial Metrics Discussion

Question Description

Capital Financial is a privately held lender that specializes inbusiness loans. They have enjoyed great success historically. However,they have been on an incredible run recently as they have hadtwenty-four consecutive months without a missed payment for their entirebook of business. Their loans are generally between $25,000 and$100,000. Considering their recent success and their desire to gopublic, the CFO has decided to seek clients with bigger business needs.This strategy can yield greater rewards, but it is accompanied bygreater risk. The CFO got her wish and landed YGC Inc. as a client, apublicly traded store that needed $1,000,000 in capital to open a newlocation. The Capital Financial analysts were impressed with the firm’slevel of profitability. Their impressive financial performancecorrelated with a stock price on the incline. Capital Financial issuedfavorable credit terms to YGC Inc. for $1,000,000 which is ten times theamount they normally issue loans for.

A secondary audit by Capital Financial has revealed that the initialanalysis did not sufficiently analyze all of YGC’s financial statements.While YGC is extremely profitable, they are also highly leveraged. TheCFO was furious when he learned of this.

For this case study, you will create a business report addressing therequisite considerations. Your report will be viewed by seniormanagement and should address the following points:

Explain why loaning to a profitable, yet highly leveraged firm likeYGC can be a risk for Capital Financial. Identify the type of risk.
How can the risk be mitigated at this point? Describe the stepsCapital Financial can take at this point to reduce their risk exposure.

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