George Stamper, a credit analyst with Micro-Encapsulators Corp (MEC)
George Stamper, a credit analyst with Micro-Encapsulators Corp (MEC) needed to respond to an urgent email request from the southwest sales office. The local sales manager reported that she had an opportunity to clinch an order from Miami Spice (MS) for 50 encapsulators at $10,000 each. She added that she was particularly keen to secure this order since MS was likely to have a continuing need for 50 encapsulators a year and could therefore prove a very valuable customer.
However, orders of this size to a new customer generally required head office agreement, and it was therefore George’s responsibility to make a rapid assessment of MS’s creditworthiness and to approve or disapprove the sale. Mr. Stamper knew that MS was a medium sized company with a patch earnings record. After growing rapidly in the 1980’s , MS had encountered strong competition in its princpal markets and earnings had fallen sharply. Mr. Stamper also made a number of other checks on MS. The company ahd a small issue of bonds outstanding, which were rated B by Moody’s.
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Inquires through MEC’s bank indicated that MS had unused lines of credit totaling $5 milliion but had entered into discussion with its bank for a renewal of a $15 million bank loan that was due to be repaid at the end of the year. Telephone calls to MS’s other suppliers suggested that the company had recently been 30 days late in paying its bills. Question What is the break even probability of default? How is it affected by the delay before MS pays its bills.? How should George Stamper’s decision be affected by teh possibility of repeat orders?