You are considering making a loan to Kellogg’s (Kellogg Company). The following information is from the statements of cash flows and the notes to the consolidated financial statements included in Form 10-K for fiscal years 2015 and 2014 (in millions of dollars):
From the 2015 Form 10-K: Scheduled principal repayments on long-term debt are (in mil-lions): 2016—$1,262; 2017—$627; 2018—$407; 2019—$506; 2020—$851; 2021 and beyond—$2,864.
From the 2014 Form 10-K: Scheduled principal repayments on long-term debt are (in millions):2015—$607; 2016—$1,256; 2017—$661; 2018—$402; 2019—$501; 2020 and beyond—$3,121.
The following information is from General Mills’ statements of cash flows and the notes to the consolidated financial statements included in Form 10-K for fiscal years 2015 and 2014 (in millions of dollars):
From the 2015 Form 10-K: Principal payments due on long-term debt in the next five years based on stated contractual maturities, our intent to redeem, or put rights of certain note holders are $1,000.4 million in fiscal 2016, $1,103.4 million in fiscal 2017, $604.5 million in fis-cal 2018, $1,150.2 million in fiscal 2019, and $500.1 million in fiscal 2020.From the 2014 Form 10-K: Principal payments due on long-term debt in the next five years based on stated contractual maturities, our intent to redeem, or put rights of certain note holders are $1,250.6 million in fiscal 2015, $1,000.6 million in fiscal 2016, $1,000.0 million in fiscal 2017, $100.0 million in fiscal 2018, and $1,150.0 million in fiscal 2019.
Required
Part A. The Ratio Analysis Model
A lender must assess a company’s ability to generate sufficient cash from operations to not only invest in property and equipment but also to make scheduled payments on long-term debt. The cash flow adequacy ratio helps a lender make this determination. Replicate the five steps in the Ratio Analysis
Model on pages 583–584 to analyze the cash flow adequacy ratios for Kellogg’s and General Mills:
1. Formulate the Question
2. Gather the Information from the Financial Statements
3. Calculate the Ratio
4. Compare the Ratio with Other Ratios
5. Interpret the Ratios
Part B. The Business Decision Model
A lender must consider a variety of factors, including financial ratios, before making a loan. Repli-cate the five steps in the Business Decision Model on page 585 to decide whether to loan money to Kellogg’s.
1. Formulate the Question
2. Gather Information from the Financial Statements and Other Sources
3. Analyze the Information Gathered
4. Make the Decision
5. Monitor Your Decision.
