Emergency Loan Penalties

Emergency loans are issued to companies that run out of cash during the year. Typically, these companies produce too much inventory or allow purchases of capacity and automation to go unfunded. Emergency loans are a shock to stockholders. To cover the cash shortfall, management was forced to seek funding with above-market interest rates. Clearly this will affect the stockholder’s valuation of the stock. Capstone® addresses this as follows:

1. Generally, an emergency loan penalty will be equal to the amount of the emergency loan divided by shares outstanding. For example, with 2 million shares outstanding, a $6 million emergency loan will reduce share price by $3.00.
2. An emergency loan can cut the stock price to as much as half the book value, but no more.
3. Any emergency loan, no matter how small, drops stock price by at least 10%.