LENDING CASE STUDY COMPLETION GUIDELINES – SEAGULL PTY LTD
The best way to complete the case study successful is to understand what is exactly required from you and how to go about to address the requirements in a logical sequence.
This case study mimics a real business loan application received by a bank. In order to determine whether the loan application should be approved or not will require the following from you:
Step 1
Read chapters 8, 10 and 11 of the text book.
Step 2
Read the case study information provided to you as well as the extract from the credit policy of Remagen Bank.
Step 3
Write a short introduction indicating the needs of the business (less than half a page).
Step 4
Calculate the monthly repayments that the mortgage bond of $320,000 will require based on the information contained in chapters 6.
Step 5
Refer to the credit proposal structure contained in chapter 11 of the textbook and use the structure as reference to construct your own credit proposal. You will note that the structure provided in the textbook is very complete and addresses plenty aspects. Since it is a generic structure, there may be aspects contained in the structure that is not really relevant to the specific case study that you are working on the structure intends to cover all possible things that bankers should consider when assessing credit applications from businesses. Although a credit proposal should contain all important relevant information, you do not have to include information about aspects that are not really relevant or important for the business to which the credit proposal applies.
Start with the background part of the credit proposal. Use the information provided in the case study and other important public information that you may possess about the business/industry/macro environment to write the information up to provide the reader a good understanding of:
· The business profile
· Owners/shareholders of the business
· The business management
· The ability of the business to survive
· The business premises
· The existing financial relationships of the business
· Credit records of the business
· Borrowing powers applicable to the business
This background part should be maximum three pages.
Step 6
Use the standard income statement structure that bankers apply (page 229 in chapter 10) as well as the extract from the credit policy of Remagen Bank to restructure the Income Statement and balance sheet of the business.
In the case of private companies always check whether the balance sheet of the business contains any shareholder or director loans. If yes, remember that shareholder or director loans are always debt provided to the business and can be withdrawn from the business by them. If there are shareholder or director loans then scrutinize the notes to the financial statements to determine whether such loans have been ceded to any specific creditor or been subordinated to the loans of all other creditors or just specific ones. This is a very important issue. If the loans have been subordinated to the loans of all creditors or specifically to loans from your bank (not only other banks or creditors), then the shareholder or director loans can be regarded as equity otherwise it should be regarded as debt. If the shareholder or director loans have been ceded to your bank, then it can also be regarded as equity. If ceded to any other creditor, then it remains debt.
You must ensure that the shareholder or director loans are reflected as debt in the balance sheet if not ceded or subordinated to all creditors or specifically to your bank. On the other hand when subordination applies to all creditors or specifically to your bank, then you should regard it as part of equity. In the case of the shareholder or director loans ceded to your bank, you should also regard it as equity. The reason why the shareholder or director loans are regarded as equity by banks is such cases is because the shareholder and director loans that are subordinated or ceded cannot be withdrawn legitimately by the shareholders or directors of the company until such time that all creditors to whom it is subordinated/ceded has been repaid in full. The shareholder or director loans will therefore remain part of the business capital similar to equity until the debt to the relevant creditors has been repaid.
In essence make changes to the balance sheet based on the aforementioned information regarding subordinated or ceded shareholder or director loans.
The restructured income statement and balance sheet should be included in the credit proposal.
Income statement for the year ended on 28 February 20XX
20XX
20XX-1
Turnover/Sales
Less cost of sales:
Opening stock
Purchases
closing stock
Gross profit
Less expenses
Operating profit
Other income
Other expenses
Net income before interest and tax
Interest
Net profit before tax
Tax
Net profit after tax
Balance sheet as at 28 February 20XX
20XX
20XX-1
20XX
20XX-1
Assets
Equity
Current assets
Current liabilities
Step 7
Calculate and interpret the ratios (on pages 248 to 251 in chapter 10 of the text book and also contained in the credit policy extract of Remagen Bank) based on the new income statement format that you used and changes you made to the balance sheet because of ceded or subordinated shareholder or director loans.
Depict the ratio calculations in table format.
RATIOS
Figure
Figure
Ratio
Ratio
20XX-1
20XX
20XX -1
20XX
ROA
Income before interest and tax/
x 100/
Total Assets
1
ROE
Income before tax/
x 100/
Equity
1
Financial
ROE/
leverage
ROA
GP%
GP/
x 100/
Turnover
1
Operating
Operating income/
x 100/
margin
Turnover
1
NIBT
Net income before tax/
x 100/
Turnover
1
NIAT
Net income after tax/
x 100/
Turnover
1
Turnover of
fixed assets
Turnover/
Fixed assets
Turnover of
current assets
Turnover/
Current assets
Debtors payment
Trade debtors/
x 360/
period
Credit sales
1
Creditors payment
Trade creditors/
x 360/
period
Credit purchases
1
Stock turnover
Stock/
x 360/
days
Cost of sales
1
Current ratio
Current assets/
Current liabilities
Acid test
Current assets – stock/
Current liabilities
Solvency ratio
Debt/
x 100/
Total assets
1
Interest Coverage
Operating Profit/
Interest Paid
Capitalisation Ratio
Long Tern Debt/
Long Term Debt + Equity
Long Term Debt to
Long Term Debt/
Net Working Capital
Cur Assets-Cur Liabilities
Step 8
After writing up and interpreting the background and historical financial position of the business – construct a Strengths, Weaknesses, Opportunities, Threats (SWOT) matrix in which you list a maximum of five strengths, five weaknesses, five opportunities and five threats. The SWOT therefore serves as a summary of the background and historical financial position. Please note that this should be done by just stating each one in a single sentence, since the reason for each of the SWOT statements is already reflected in the background and historical financial position sections where information was provided more comprehensively.
SWOT ANALYSIS
Strengths
Weaknesses
Opportunities
Threats
Step 9
Construct the budgeted cash flow for the business based on the information provided in the case study and by using the cash flow budget template provided. Please note that the template contains specific formulas for cells to do automatic calculations to assist you.
Your cash flow budget is be correct if it shows a closing overdraft balance of +$313,655.63 in February.
Step 10
Assess the realism of the budgeted cash flow figures by comparing it to previous year financial statement figures and ratios like debtors, creditors etc. and also the SWOT analysis information.
Adjust three figures in the budgeted cash flow to make it more realistic. Indicate which figures you changed by footnote at the bottom of the cash flow with very brief reasons.
Comment about the future repayment ability of the business.
Step 11
List all loans of the business to your bank including the new loans applied for as well as existing and new collateral offered to your bank/ required by your bank in the following format:
Existing loan type
Outstanding amount of loan
$
$
New loan type
$
$
Total loans
$
Existing collateral type
Nominal value of collateral
Value assigned to collateral based on Remagen Bank credit policy
Reason for assigned collateral value (refer to the characteristics of good collateral)
$
$
New collateral type
$
$
Total collateral
$
Step 12
Discuss the suitability of the transaction (only one or two paragraphs).
Step 13
Discuss the profitability of the transaction from the banks point of view (only one or two paragraphs).
Step 14
Provide a recommendation (maximum half a page) whether the transaction should be approved or not