Cuac

2008 Bank Study Project

Sea Power Company

In September, 2008, Charlie Johnson drove from Oyster Cove to the seacoast operations of Sea Power. The company had deposits in Johnson's bank, Cove National, where he was a commercial loan officer. On the morning of his visit to Sea Power, Johnson expected the company's CEO, Ralph Perkins, to describe the firm's borrowing needs for the next year.Sea Power was established in the 1990s to manufacture and market devices for producing electrical power from ocean waves. Initially the company planned to develop equipment that would use the repetitive force of tidal movements to generate power, but the tide elevation along the local coastline was not sufficient to continue this line of business. However, it was found that smaller generatingunits could be used in arrays along the coastal property of Sea Power. The multiple sites would produce electrical energy for the company's operations.
Over the past decade Sea Power had increased the scope of its production of ocean-wave electrical generators. The product line now included a variety of units having the ability to provide power for customers ranging from hotels and condominium sitesto individual residences. Small coastal communities in developing countries were interested in this energy source available at a reasonable cost. At the same time, the company had developed its land at the seashore into a family entertainment facility. While the generating units were busy making electricity from ocean waves, local residents and tourists were enjoying rides and exhibits thatfeatured themes associated with the seafaring history of Oyster Cove.
As Charlie Johnson and Ralph Perkins walked through the manufacturing plant, Perkins reviewed the history of his company. It started with the idea of using coastal land inherited by his wife, Stella, for business income. Perkins had used his electrical engineering background to invent and perfect the generating units the company nowsold worldwide. The addition of the seaside entertainment park was his wife’s idea, and she assisted in its design and management.
According to Perkins, Sea Power's financial needs for the year 2009 included long-term funding for a plant expansion as well as a short-term line of credit to cover the company's seasonal cash flow requirements. He had given Johnson a cash budget that extended throughDecember, 2008, and the two agreed to accept those projected numbers as the correct basis for the 2009 cash budget and other financial statements. The cost of the proposed plant building and equipment was $610,000. This amount was due to be paid to the building contractor on January 1st 2009.
Perkins asked Johnson to have his bank provide 65 percent of the new building's cost. Sea Power wouldfinance the remaining cash required from short-term securities it expected to hold at the end of December, 2008. One of the exhibits included by Perkins, Exhibit 1, shows the company's gross fixed assets increasing by $610,000 and the amount of net fixed assets at the end of 2009, following the deduction of accumulated depreciation. Johnson noted that annual depreciation was equal to 7.50 percent ofgross fixed assets.
The bank was also requested to combine Sea Power's previous long-term debt, consisting of a current portion (principal originally expected to be paid during the following twelve months) of $70,756 and long-term debt equal to $1,908,634. The addition of new long-term debt would create a 15-year term loan of $2,375,890 on January 1, 2009. Exhibit 2 is the amortization schedulefor the requested term loan. The Interest rate per month calculated by Johnson will produce the quoted rate of interest at 10 percent annually.
Sales for 2009 are expected to increase by 10.5 percent over sales in 2008, and sales in 2010 should again increase by 10.5 percent of those in 2009 according to The Sea Power marketing department. The entertainment segment of the business has caused a...