Advanced Medical Technology Corporation

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Advanced Medical Technology Corporation

Background

Advanced Medical Technology Corporation (AMT) dealt with scientific instruments that made access to certain organs and vessels quicker and less invasive.  Currently, AMT has a line of credit with Sunnyvale Bank for $6 million.  Sunnyvale Bank would not increase the current line.  The president of Advanced Medical Technology Corporation, Peter Haskins, requested a line of credit from Western National Bank of San Francisco in the amount of $8 million to finance its activities.

Issues

  1. What are the financial projections for the upcoming 3 years, 1986, 1987 and 1988?  Assume that sales grow at 35% a year and operations do not change.  Forecast the income statement and balance sheet. (Exhibits 1 & 2)

  1. How much external financing will be necessary? (Exhibit 2)

  1. If we were the bank, would we make the loan?

Analysis:

Exhibits 1 and 2 show the Pro Forma Income Statements and Balance Sheets respectively.  The income statements indicate that while Advanced Medical Technology Corporation’s (AMT) projected gross profit increases over the years, the heavy investment in research and development causes an operating loss and subsequently a negative net income.  To finance the level of R & D AMT wants to do, increasing amounts of external financing are necessary.  

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Using the assumptions outlined in the Exhibits 1 and 2, in 1988 a $32,767,000 loan will be necessary for the company to continue its operations.  This is roughly four times the amount requested by Haskins.

The ratio analysis, displayed in Exhibit 3, yielded the following results: Over the coming three years (86-88) AMT will continue to see negative returns on assets, indicating that the company is not generating any profits from its deployed assets.  Low Debt to Assets ratio shows that AMT is not highly leveraged and has a low risk for running into problems with creditors. ...

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