Case Study Analysis: Mini Case - Capstan Autos a. Briefly summarize the case. Prepare a response to Mr.

See attached file.Case Study Analysis: Mini Case - Capstan Autos a. Briefly summarize the case.b. Prepare a response to Mr. Capstan from the bank in which you explain why the bank would be reluctant to extend further credit to his organization even though his organization appears to be projecting sales growth.Provide anwsers to following questions: Mr. Capstan kept on coming back to three questions: 1. Was his company really in trouble?2. Could the bank be right in its decision to withhold further credit?3. And why was the company's indebtedness increasing when its profits were higher than ever? Please back up answers with ratios if necessary. Capstan Autos operated an East Coast dealership for a majorJapanese car manufacturer. Capstan's owner, Sidney Capstan, attributedmuch of the business's success to its no-frills policy ofcompetitive pricing and immediate cash payment. The businesswas basically a simple one-the firm imported cars at the beginningof each quarter and paid the manufacturer at the end of thequarter. The revenues from the sale of these cars covered the paymentto the manufacturer and the expenses of running the business,as well as providing Sidney Capstan with a good return on his equityinvestment.By the fourth quarter of 2009 sales were running at 250 cars aquarter. Since the average sale price of each car was about $20,000,this translated into quarterly revenues of 250 × $20,000 = $5 million.The average cost to Capstan of each imported car was$18,000. After paying wages, rent, and other recurring costs of$200,000 per quarter and deducting depreciation of $80,000, thecompany was left with earnings before interest and taxes (EBIT) of$220,000 a quarter and net profits of $140,000.The year 2010 was not a happy year for car importers in theUnited States. Recession led to a general decline in auto sales,while the fall in the value of the dollar shaved profit margins formany dealers in imported cars. Capstan more than most firms foresawthe difficulties ahead and reacted at once by offering 6 months'free credit while holding the sale price of its cars constant. Wagesand other costs were pared by 25 percent to $150,000 a quarter, andthe company effectively eliminated all capital expenditures. Thepolicy appeared successful. Unit sales fell by 20 percent to 200units a quarter, but the company continued to operate at a satisfactoryprofit (see table).The slump in sales lasted for 6 months, but as consumer confidencebegan to return, auto sales began to recover. The company'snew policy of 6 months' free credit was proving sufficiently popularthat Sidney Capstan decided to maintain the policy. In the thirdquarter of 2010 sales had recovered to 225 units; by the fourthquarter they were 250 units; and by the first quarter of the next yearthey had reached 275 units. It looked as if by the second quarter of2011 the company could expect to sell 300 cars. Earnings beforeinterest and tax were already in excess of their previous high, andSidney Capstan was able to congratulate himself on weatheringwhat looked to be a tricky period. Over the 18-month period thefirm had earned net profits of over half a million dollars, and theequity had grown from just over $1.5 million to about $2 million.Sidney Capstan was first and foremost a superb salesman andalways left the financial aspects of the business to his financialmanager. However, there was one feature of the financial statementsthat disturbed Sidney Capstan-the mounting level of debt,which by the end of the first quarter of 2011 had reached $9.7 million.This unease turned to alarm when the financial managerphoned to say that the bank was reluctant to extend further creditand was even questioning its current level of exposure to thecompany.Mr. Capstan found it impossible to understand how such a successfulyear could have landed the company in financial difficulties.The company had always had good relationships with its bank,and the interest rate on its bank loans was a reasonable 8 percent ayear (or about 2 percent a quarter). Surely, Mr. Capstan reasoned,when the bank saw the projected sales growth for the rest of 2011,it would realize that there were plenty of profits to enable the companyto start repaying its loans.Mr. Capstan kept coming back to three questions:Was his companyreally in trouble? Could the bank be right in its decision towithhold further credit? And why was the company's indebtednessincreasing when its profits were higher than ever?